If you’re in the market to purchase a new vehicle, there are a couple of different options available to you as a consumer. You can purchase a new vehicle off the lot, choosing to pay cash or finance it though any number of financial institutions; you can shop around for a used model – either on a dealership lot or through a private seller – again, paying outright or financing the vehicle; or you can follow the road less traveled and lease a vehicle through the dealership or a third-party leasing company.
Although leasing is not a new concept in the automotive industry, it is definitely still in the minority as a choice for most consumers. Today, only about 20% of consumers are driving leased vehicles, but those drivers are savvy enough to recognize the benefits that short-term leasing can provide for some people. Following are just some of the benefits a lessee (the person leasing the vehicle) will see, including:
Low Down Payments – Most advertised lease agreements assume a down payment of a specified amount will be made at signing, but in some cases you can negotiate the amount with the dealer during the signing. The down side of a lower down payment, of course, is that your monthly payments will be higher.
Low Monthly Payments – Since you are only paying off the depreciation of the vehicle while it is in your possession – instead of its full value – your monthly payments are much lower than if you chose to finance the purchase of the entire car over the same period of time.
Easy Turnover – As long as you keep the vehicle in good shape and follow the terms of the lease, when your lease term (typically 2-4 years) is up, you simply return the vehicle to the dealership, turn in the keys, and drive off the lot with a brand new car and new lease arrangement. There is no selling the car or haggling with a dealer over trade-in value because that was all outlined in the terms of the lease beforehand.
Little-to-No Maintenance Costs – Since most warranties last an average of 3 years, which falls in line with the length of most leases, nearly all of the maintenance costs associated with the vehicle are covered. In some cases, you may even be able to negotiate free oil changes within the terms of lease, eliminating another regular expense.
No Depreciation – This means that the lessee doesn’t have to worry about owning a depreciating asset. The depreciation is passed back onto the dealership who must then sell the vehicle used at its lowered value.
But, like all things, there are also some down sides to leasing a vehicle. Since leasing is a convenience, many times that convenience can cost a little extra. Some of the disadvantages to the lessee include:
No Equity – Just like rent on an apartment, lease payments don’t go towards owning anything, so you’re not building any equity on your investment. Unlike traditional financing, there is no future day when payments will stop and you can drive your own car free-and-clear.
Lack of Flexibility – Lessees have to pay a big penalty to get out of a lease before terms are met. In some cases, depending upon your lease agreement, breaking the lease can cost you as much as six months of payments.
You May End Up Paying Extra – Most leases contain a mileage clause and will charge an extra $0.12 or $0.15 for each mile you drive over the set limit. Typically the lease agreement grants 12,000 to 15,000 miles per year (which is the national average). In addition, any damage to the car beyond normal wear-and-tear will be coming out of your pocket when you return the vehicle at the end of the lease. In some cases, lessees can negotiate to buy more miles up front at a reduced rate (usually around $0.10) to cover any possible overages.
Insurance May Come Up Short – If you total the car or it gets stolen, your insurance will only reimburse you for the car’s market value, which may not cover what you still owe on your lease. You can buy extra “gap coverage” to protect against this, and some lease agreements include it automatically.
Leasing a vehicle will not work for everyone, but for some it’s a great way to avoid maintenance bills, help to build good credit, and put themselves in a new vehicle every few years. Have you every considered leasing a vehicle? Are you leasing one now? Share your thoughts, comments and concerns in the section below – we always appreciate your feedback!
*image courtesy of Caitlinator on Flickr.com