Car Leases – Pros and Cons

They are Very Attractive

Automobile leasing companies  calculates the cost of a lease  using the difference between two main variables: the worth of the vehicle now and its residual value, that is, what the car is expected to be worth when you return it plus fees and interest. This means that:

         Cost of a Lease = Current Value of Vehicle – Residual Value(including interest + fees)

Hence when you lease a car, you will generally pay less if the company forecasts that it(the car) has a high chance of retaining its residual value,  meaning that the higher the residual value, the lesser you pay for leasing the car. It should be noted that manufacturers often priced residual values higher because they believe that the supply of cars is on the low side. This explains  both why you can lease some new cars for less than the loan payments on a gently used model(Money Magazine, 2013) and why car leasing is especially attractive today.

Car Leases Are Flexible and Easy To Negotiate

If you know how to haggle very well, most dealers will typically drop the sticker price (which is also known as the capitalized cost) by as much as 5 per cent. Even the money factor – the number that determines your interest rate – is up for grabs(Money Magazine, 2013). But to find lower offers or to compare offers, or to locate the money factor itself , you will need to search through the fine print. Today,  the interest rates  being paid for leasing a car are down. Hence it is currently not a wise move to put more money down in exchange for a price break.

Eventually, Long-Term Car Leasing Will Cost You More

While leasing usually lasts for three years, some companies may be more lenient by allowing you to stretch the payments out longer than three years. For instance, the car company Toyota has five-year deals on the Camry, Corolla and the Yaris(Money Magazine, 2013). My advice: Steer clear of long-term leases! Given that most comprehensive warranties  last three years,  you could be left with costly repairs. Besides, short leases are more likely to be subsidized since car makers want you back for new wheels.

Costly Traps

You will need to avoid some costly traps when leasing a car. Most car leasing companies in United States typically  caps the miles you can drive to 10,000 – 20,000 miles a year(Money Magazine, 2013). This means that you can owe an additional amount – say  20 cents  more a mile  - if you exceed this mileage limit. But if you are a heavy driver, you can request for a higher mileage cap and save as much as $10 or more a month. Paying more for gap insurance will also be a good move.  Note that a gap insurance covers the difference between the insured value and the higher amount you owe the leasing company if you total the car(Money Magazine, 2013). While most car dealers typically include gap insurance free of charge, banks do not always do so.

Sources

Money Magazine. (2013, January/February).  Plan – 5 Things to Know  About Car Leases.  Special Double Issues, p. 38