3 Factors to Consider When Leasing a Car

Leasing a car is a popular option but not always in your best financial interest. Depending on your lifestyle, leasing is a good alternative to buying. While driving a brand new, low-maintenance car may be enticing now, you'll pay a premium for that convenience and luxury, so it's important to understand the pros and cons.

If you're considering leasing a car, you'll first need to understand how a lease works. A car lease a contract stating you'll pay for the right to use and take responsibility for a vehicle for a set amount of time. You don't legally own the car, and you have to return it at the end of the lease if you don't want to purchase it.

The process of leasing and buying a car are identical until you sign the paperwork. When you buy a car outright, you are the legal vehicle owner and hold the title.

Lease contracts are almost always for brand new vehicles and typically last three to four years. The contracts also specify how many miles you can drive over the life of the lease, and you'll incur fees if you surpass the allotted mileage.

During the lease, you're still responsible for insuring the car and taking care of routine maintenance. Some leases include maintenance coverage, but car manufacturers are increasingly moving away from including certain costs like oil changes in the lease. However, you shouldn't need to pay for any major repairs since the manufacturer's warranty should cover those.

Lifestyle and Flexibility

Since you won't own the automobile at the end of the lease and may still be required to pay for routine maintenance, why is leasing so popular?

The main reason is the monthly payments on a lease tend to be lower than those on a comparable new vehicle. When you lease a car, you only pay for the portion of the vehicle's value that you'll "use up" during the life of the lease, rather than the full amount of the car.

However, from a financial standpoint, leasing is typically inferior to buying. Though you'll always drive newer cars, you'll have to get another one when your lease ends. If you lease again, it means you will be making car payments indefinitely.

When buying, your car loan may last between 36 and 72 months, but you own the car and no longer need to make any payments after that point. If you have a five-year loan and drive the car for 15 years, that's a full decade without car payments.

Financial Considerations

As an example, you can compare the cost of leasing vs. buying a $37,876 car (current average price) over 12 years with this car payment calculator.

The Cost of a Car Lease

An SUV at this price point calculates an estimated monthly payment of $514. This lease assumes a 36-month lease, a 60% residual, and a 0.001 money factor—details that vary depending on the manufacturer.

At this monthly price over 12 years (a total of four different leases), your total lease payments result in a whopping $74,016.

The Cost of Buying A Car

For the same $37,876 vehicle with a 60-month loan period, an interest rate of 4% (varies according to your credit score), and no down payment, buying the car brings your monthly payment to $698.

Over five years, you'll pay $41,853 for the car and won't make any loan payments for the remaining seven years. The car payments alone will save you $32,163 compared to leasing.

Comparing the $74,016 that leasing would cost to the $41,853 that buying would cost doesn't include additional repairs. However, a recent Edmunds survey shows the average annual maintenance cost for a similar vehicle is roughly $1,000 per year, so buying still wins by a hefty margin.

Car Leasing Tips

Over a quarter of all new car deals are leases, so if leasing sounds like a smarter financial decision, here are a few things to consider.

First, you should handle the majority of your car searches and negotiations online, as it helps you keep a written record of everything. This is especially helpful when tracking all the variables of a lease contract.

Next, you'll want to familiarize yourself with basic lease verbiage. Knowing the car's lease term, annual mileage allowance, MSRP, and negotiated sale price helps you calculate your monthly payment. From there, you can find the car's money factor and residual %, which varies by make and model and is the estimated worth of the car at the end of the lease. The higher the residual, the lower your payment.

The money factor is the interest or financing rate for the lease. This varies based on your credit, but knowing the lowest available money factor will help you negotiate.

You can find manufacturers' residual values and money factors for specific cars online via online forums. Like all big financial decisions, researching will help you make the best decision possible.

When deciding to lease a car, all financial, lifestyle, and professional aspects need to be considered. From a long-term financial standpoint, buying may be a better option, so think carefully before signing the dotted line.