Budgets and Planning

To Lease Or Not To Lease, That Is The Question

By Candace Bahr, CEA, CDFA and Ginita Wall, CPA, CFP

If you are in the market for a new car, you may have been tempted by the low monthly payments featured in the advertisements for leasing arrangements.

With a lease, you can expect to make little or no down payment and make lower monthly payments.

At the end of the lease period, you don’t have to worry about the trade-in or sale of the used car. You can just turn back the keys to the leasing company, sign a lease on a new vehicle, and drive away.

That leads us to the major disadvantages of leasing a car.

Granted, your monthly payment is less each month if you lease, but at the end of the lease period, you don’t own the car.

If you want to continue driving the same car, you must purchase it from the leasing company for its current market value.

Leasing a car has other disadvantages:

A good credit rating is more important when you lease a car than when you purchase one, because your down payment is very small.
You must purchase special "gap" insurance that will cover the remaining lease payments on the leased car if it is wrecked or stolen.
At the end of the lease period, you may be charged for miles you drove in excess of the maximum specified in your lease
You also may be charged for excess wear and tear and dings on the car.

Leasing a car may save you money, if your credit rating is good, you tend to trade cars every few years, and you don’t drive more than 15,000 miles a year.

Leasing also is useful to those who have little money for a down payment and for those who desire a lower monthly payment than would be possible with straight financing of a purchased auto.

Here is a worksheet that you can use to compare the cost of buying versus leasing.

Cost to Purchase
1. Vehicle price
2. Down payment
3. Amount financed (1 - 2)
4. Monthly payments ($)
5. Length of loan (months)
6. Total payments (4 x 5)
7. Sales tax and out of pocket costs
8. Residual value
Total cost to Purchase (2 + 6 + 7 - 8)



Cost to Lease
1. Monthly payments ($)
2. Length of lease (months)
3. Total payments (1 x 2)
4. Up-front costs, if any
5. Disposition fees, if any
6. Cost of gap insurance
Total Cost to Lease (3 + 4 + 5 + 6)

ExcelEverywhere

If you are planning to lease a car, don’t be afraid to negotiate with the leasing company over lease terms, up-front costs, or monthly payments, just as you would when purchasing a new car.

Here are some of the things to look for in an auto lease:

A lease term that corresponds to the length of time you’ll want to keep the car
Low up-front "capital cost reduction" (read "down payment")
Closed-end lease so you won’t be charged if the car is worth less than the estimated residual value
Mileage limit that corresponds to your driving habits
No extra charge for moving the vehicle out of state
Guaranteed-price purchase option
Security deposit not in excess of one monthly payment
Payments that are less than you would pay on a car loan.
No early termination fee.
Ability to incorporate the cost of extra miles into the monthly payments at a reduced cost.
Refund provision for cost of extra miles you buy but don’t drive.

Auto leasing questions? At WIFE we welcome your comments. Please feel free to contact us.

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