Latest posts by Kumiko Ehrmantraut (see all)
- Instant Gratification Wish List: Becoming a Patient Spender - July 17, 2019
Are you in the market for a new vehicle? Maybe you’re looking for something with better gas mileage, or you need a car with more current safety features or you just really want the latest technology.
Despite your needs and wants, the price of buying a new vehicle makes upgrading nearly impossible for your budget.
Before making a decision about buying a new vehicle, I want to remind you that it is always my recommendation that the best way to buy a car is to pay cash for something pre-owned. After purchasing my first new car back in 2016, I wish I would have made the decision to avoid paying both interest and off-the-lot depreciation. Luckily, I was able to pay off my new car in late 2018.
With the lower monthly payments that leasing a new car offers, could leasing be a good option for you?
Leasing a New Car
Auto manufacturers are all about their lease programs. They spend millions of dollars advertising this option because, frankly, they gain the most revenue from their leased vehicles.
BMW entices you with “High thrills meet low monthly payments.” Mercedes-Benz tempts you to “Seize the Moment – Drive the Collection.” Other automakers assure that when you lease from them, “You drive without worry. You only pay a portion of the vehicle’s cost. There’s no money down. If you want to drive a new car with the most affordable payment, leasing is the way to go. Customize your terms and mileage options. It’s a smart decision.”
But is leasing a car really a smart decision?
Let’s identify some of the pros and cons so you can decide what option is right for you.
The Benefits of Leasing a New Car
Low Payments
If you are in search of the smallest impact to your current monthly budget, no question leasing a new car gives you a much lower payment than buying a new car. For example, if you buy a new 2019 vehicle for $24,000, your payments can be as much as $532 for a 48-month loan. Loan payments are based on the purchase price (or value) of the car.
However, if you sign up for a 36-month lease program for the same vehicle, your monthly payments will be around $229. That’s because lease payments are based on the car’s depreciation for the duration of the 36 months, rather than its value. This can mean a considerable cost difference when it comes to your monthly budget.
Not only are the monthly payments much lower, but most manufacturers and dealers also sweeten the deal with “no down payment” options as well.
Low Stress
Another perk is that lease cars come complete with maintenance contracts. For the most part, all the regular upkeep that will need to be done while you are driving the vehicle will be covered by your lease. This makes auto maintenance easy.
Also, when your lease is up, you don’t have the hassle of a resale or a trade-in. At the end of your 3-year contract, you can simply upgrade to another new vehicle, making sure you are always driving in style.
The Drawbacks of Leasing a New Car
Low monthly costs and free maintenance sound like nirvana, right? What could be better than less stress with the best possible payment?
Remember though, the best possible payment does NOT necessarily equal the best possible cost. This is definitely an example of “Buyer Beware,” or in this case, “Leaser Beware.” After all, you’re just renting. When you lease a vehicle, your payments aren’t being invested in the car. You won’t own it when the lease is up.
Also, there are hidden fees, and charges automakers don’t like to advertise.
Penalties
Your lease is not flexible. If your family size changes and you need a different vehicle, you may have to wait out the full 36-month lease before you can. If your finances are negatively impacted because of a job loss or health issues, and you need out of your lease, you may not legally be able to get out. At the very least you will be liable for some steep penalties.
Mileage and Depreciation
Lease contracts come with mileage limitations. Many leases only allow you 10,000 to 12,000 drive miles per year. Any miles you put on the odometer over the contract agreement may cost you as much as 25 cents a mile.
According to the U.S. Department of Transportation, the average U.S. driver puts in 13,474 road miles each year. This 25-cents-per-mile difference is another $868.50 per year or $72.38 per month. Suddenly your $229 monthly payment is now over $300.
Interest
The Federal Trade Commission does not consider a lease to be a debt. As such, interest rates on lease contracts do not have to be disclosed. This means there is no “truth in lending” disclosure sheet and the lessee (you) is often charged exorbitantly high-interest rates without knowing it.
Repairs
While your lease contract covers scheduled maintenance, it does not cover wear and tear, glass replacement, worn tires, or any dings or scratches you may incur while under your care. You will still be held financially responsible for the cost of repairs. If you owned the vehicle, you might not bother repairing these minor items, but as a lease vehicle, you may not have a choice.
Insurance
Your lease contract may also require you to pay for more insurance coverage than you really need or want. It will be imperative to have both comprehensive and collision coverage on a car that has a lease or a lien, but leasing companies generally have higher acceptable amount standards than loan companies.
You may also need gap insurance. Some lease contracts include gap insurance, others don’t. Gap insurance helps to minimize the difference between the value of your car and what you still owe in the event it is stolen or totaled as the result of an accident.
Now let’s take a look at the pros and cons of purchasing a new car.
The Benefits and Drawbacks of Buying a New Car
Payments
No doubt, if you are borrowing the money to purchase a new car, your monthly payments can be quite high. Like we talked about earlier, your loan payment will be several hundred dollars and could be double or more the monthly cost of leasing a vehicle.
However, your monthly payments are going toward the value of your car, not just toward its depreciation. And, eventually, your payments will end.
Once your loan is paid off, the vehicle belongs to you. And though a car is never really an investment because they continually depreciate in value. In fact, according to current rates, the value of a new vehicle can depreciate by more than 20 percent in the first year of ownership.
Still, your car is still an asset. You can continue to drive it, payment free, for as long as it is functional. You can sell it or trade it in at any point in time. It is yours.
Stress
The bad news is: with a vehicle you purchase, you are solely responsible for maintenance costs.
The good news is: the average cost for maintaining a vehicle is just $408 per year. This comes down to a $34 a month, making the maintenance clause in a lease contract not seem quite as impressive.
Interest
If your credit score is good, interest on a new car loan is low. Many automakers even offer 0% financing if you borrow the money through them.
The Real Cost of Leasing vs. Buying a New Vehicle
When you crunch the numbers, it looks something like this:
For a Lease Vehicle:
Assuming you lease a new $24,000 car:
- 36 Monthly payments around $299
- No maintenance fees
- Mileage overage of $868.50 per year
- At the end of your 36-month contract, you will have spent $13,369.
For the sake of long-term comparison, let’s acknowledge that you own nothing and assume you lease again for another 72 months. Your total cost for 9 years of leasing will be approximately $40,108.
For a New Car Purchase:
Assuming you purchase a new $24,000 car:
- 48 Monthly payments around #532
- Average maintenance fees of $408 per year
- At the end of your loan, you will have spent about $27,168
For the long-term comparison, let’s assume you drive the paid-off car for the next 5 years with no further monthly payments, just the average maintenance cost. Your total cost for the 9 years since you first bought the vehicle will be approximately 29,208.
This means, in the long run, that your higher monthly payments will still save you over $10,000 in the long term. And, even though it may be 9 years old and have well over 120k miles, you still own a vehicle at the end of the process.
The Right Decision for You
While purchasing a car will be the most cost-effective in the long-term, leasing can be a viable option for some. Any financial decision deserves your thorough research and detailed cost comparisons. Crunch the numbers, make a list of priorities, shop around for the best rates, and make the decision that ultimately works best for you.
do you think trading in a car that you’re upside-down ($34k) on in order to lease for 3 years and then start fresh is worth it?
I’m wondering the same thing. Were currently upside down in value on a car loan and I’m wondering if making larger payments each month to get “right-side up” again is better than just trading the vehicle in and cutting the loses.
I just leased a car to get out of a negative equity situation brought on because of a divorce.
Although I love my new car, better gas mileage, lower insurance, and a little bit lower payment, I am regretting the decision. In retrospect, I should have paid down on the first car and then I could have traded it for a less expensive option. Now, I am stuck for three years.