Some experts say car leases are a great way to drive a car with affordable payments and without too many strings attached. Others claim it's a waste of money, even a borderline scam. Either way, taking out a lease for your next car requires you to consider a confusing array of variables.
It doesn't have to be that way. Essentially, leasing a car is not dissimilar to buying a car with a loan; for a lease, the dealer or the car manufacturer is the one taking out the loan on your car. The lease payments are used to pay off the loan. Of course, there are other differences too, and for those still debating leasing versus buying, SmartMoney offers calculators to make the decision easier.
One thing is clear: leasing is more available when the car business is healthy. Following the depths of the financial crisis and car manufacturer bankruptcies and restructuring, the business's strong comeback has brought the car lease debate back with it. As you manage your own buy or lease decision, here are a few tips to keep in mind.
Sort out your priorities. Experts agree that leasing isn't for everyone. If ownership is important to you, then buying is undoubtedly a good option: Someone who spends his whole adult life leasing will spend far more than if he bought a car, paid it off and continued driving it.
- You are so predictable. According to LeaseGuide.com, lease only if you drive a predictable number of miles, take care of your cars and are willing to stick with your contract; this way, you can avoid hefty charges for extra miles, early termination and excessive wear-and-tear.
- Do the math. Our calculator makes the decision easy, and even factors in data like the rate of return on your investment portfolio.
Choose the right car. Lease payments are generally determined by first calculating the difference between a car's sale price and its future resale, or residual, value. The higher the future resale value, the lower the monthly payment.
- Be a brand snob. This makes it important, according to experts, to only lease cars that maintain high resale values, such as Japanese and luxury European brands. American brands tend to have the lowest resale values, though there are exceptions on specific models.
- By the numbers. Kelley Blue Book is a good resource for looking up used-car values. Other key numbers to keep in mind: the size of the initial down payment, the mileage allowance and the length of the lease contract.
Be prepared. Start online by looking for monthly lease specials and manufacturer-sponsored deals, which experts say are often genuinely good deals and tend to be widely advertised. In the case of sites like LeaseTrader and Swapalease, which allow you to buy short-term leases from others looking to get out of theirs, doing your homework means lining up financing from a bank and filling out the large amount of paperwork involved in such transactions.
What not to do. It's easy to make one of these common mistakes:
- Don't lease for a term longer than the warranty. If the new-car warranty expires during your lease term, you may be stuck with the cost of any repairs after the expiration date. And you don't even own the car.
- Don't reveal your payment threshold. Indicating how much you are willing or able to spend on your lease can backfire. Dealers can give you the car you want for your desired monthly payment, but make the final payment several thousand dollars to make up for it a trick that can cause quite a shock for people who didn't pay attention in the first place.
- Don't forget to read the fine print. Most major lease providers supply "gap" coverage, which pays off the balance of what you owe (minus your insurance company's contribution) in cases where your leased car is stolen or destroyed. It's worth double-checking that it's there; otherwise, you could potentially be responsible for hundreds or thousands of dollars in lease termination costs.
For more to read: Try Edmunds and Kelley Blue Book for car values, LeaseGuide for more on what to do when considering a lease, and LeaseTrader or Swapalease if you are looking to take over someone else's lease or pawn yours off.