How to Lease a Car
Auto leases are one way to have the car ownership experience without holding onto the car in its later years. Although many financial advisors will tell you that leasing a car tends to be a bad financial decision, the one advantage of a lease over buying is that you can frequently pay less per month for a car than you would if you were to buy. Here’s how to make the right decision.
When you lease a car, you pay the owner for the right to enter a long term rental agreement. At the end of the term, you will have to give back the car and you will have nothing to show for the payments that you made. Because cars lose their value faster at the beginning of their lives than they do at the end of their lives, the person that you are leasing the car from (usually the dealership) will be passing that cost on to you. In addition to the loss of the car’s value, they will incur the costs of preparing the car for sale as a used car, and their administrative costs for keeping track of the lease. They will be passing those costs on to you. Therefore, over the course of a two or three year lease, you will be worse off than if you held the car yourself.
There are a few people for whom a lease makes sense. Many people are in a line of work where they are expected to drive a new car and that it should be a fairly nice car. If you are using your car for business in that kind of work, leasing allows you to get a more expensive car and allows you to plan to turn the car in after a couple of years to move to another new car.
There are some ways that leasing a car is similar to buying. Expect that the dealership will be looking into your credit history. They will be loaning you a car and counting on your ability and willingness to make monthly payments to them. If you have a history of failing to make payments, or you are already in too much debt, they will be reluctant to lease to you.
As you prepare to enter the lease, ask to have all the terms of the lease given to you in writing. You need to know three big items: the monthly payment that you are signing up for, the amount of money that you need to bring to get the keys, and what the procedures and terms will be for turning in the lease after the term is up. In that third category, it is imperative that you know how many miles you can drive on the car before you start to get charged for extra miles. Those costs can really add up, and many low mileage leases only allow 10,000 or 12,000 miles per year. If your driving habits are more than this, you could pay huge costs when you return the vehicle. Expect that the dealership will charge you for anything more than normal wear and tear. These costs can also add up.
Once you have received all of this information, ask yourself one more time whether you need to lease. With a bit of research, you can evaluate whether it makes more sense financially to buy the car and either hold it, give it to a family member, or sell it used yourself (which is all that the dealership is going to do with your lease turn in.) The dealership is not entering a transaction that will lose money. They will lease you the car because they know that they will make more in the end by taking your payments and selling the car again in three years.
