Leasing is just another method of financing the car, so those saying it's "throwing your money away" just don't understand how leasing. show more Leasing is just another method of financing the car, so those saying it's "throwing your money away" just don't understand how leasing works. Leasing is a financial tool to use and/or buy the car. Nothing more and nothing less.
Leasing is NOT for everyone. It's a contract that gives you some distinct advantages over purchasing, such as letting the lendor take the risk of unexpected depreciation, and of course lower payments. But there's a trade-off (like pretty much everything else in life, huh?) in the higher carrying costs you'll pay over time. I'll give you a quick snapshot of each here--
First, the best feature about leasing is that you can get a guaranteed end-value. That means that if the vehicle depreciates more than you and the bank expected, you have the choice of walking away and letting the bank suffer the loss. This is a *real* savings because your lease payment is computed by taking your depreciation over the term and then adding a "money factor" (essentially an interest rate). So if the bank guarantees a high residual value, your payment is lower than it would be otherwise, because you are simply paying for less depreciation. If that high residual value fails to materialize, it's the bank's loss, not yours.
On the other hand, if the car doesn't depreciate as much as you expected, you have the option to buy the car for the residual value. In this case, you paid for a certain amount of depreciation, and then, wouldn't you know it, the car didn't lose that much value. You can recoup some of the money you paid in for the car by reselling it yourself, if you are inclined to go through that extra hassle yourself.
So regarding the future value of the car, leasing gives you a guarantee, and a "jumping off" point. Unlike a traditional retail contract, where you are stuck with the car and all of it's depreciation, no matter how good or bad that turns out to be. Leasing can protect you against a vehicle that suddenly loses a lot of value due to market conditions. For instance, anyone that leased a Hummer 2 years ago when gas was "cheap" at $1.99 a gallon is in much better shape right now than someone who purchased the same Hummer, as the resale on those things have plummeted like, well, like a big huge hunk of lead. (No offense intended to Hummer fans, of course.)
Now, remember I said there's a trade-off in higher carrying costs? Here's
how that works. Leases don't use interest rates, in the traditional sense anyway. But when the lease is figured, there's a "money cost" factor, which (toe-may-toe toe-mah-toe) is still an interest rate. And the good news is that by and large, interest rates on leases are usually a little bit lower than on retail installment contracts. But there is still a reason to watch out for these costs. In fact, a few of them.
While the interest rate, um, er, I mean "money factor" is lower, there are other fees that can really alter the amount of the payment. Acquisition fees on a lease can run $300-400. And a lot of leases these days have a disposition fee at the end that can be the same or even higher. These fees effectively raise your cost to borrow, and retail installment contracts simply don't have them. But hey, that's not the really bad news.
The really bad news is that if you decide to just pay the car off at the end of the lease and own it, you'll have paid much more interest and fees than on a retail contract. This is because your lower monthly payment means you lower your principal very slowly, and hence, you are always paying interest (money factor) against more principal. So even though the rate is lower, your total borrowing cost can be higher.
So, what to do? Well that depends.
If you think you will trade the car in a couple or three years, there are many good reasons to do the lease. Your only likely to lose if you choose instead to keep the car longer (where you'll have paid more interest than needed) or shorter (where you'll often find that it's much easier to be "upside down" and harder to get out from under your financial agreement.) Also, remember that if you are going to turn in the car at the end of the lease, you'll be responsible for assuring that the mileage is as agreed originally, and the car is in good shape, doesn't need tires, etc. You need to be sure the lease is structured to your intended use of the car, both in term and mileage.
If you can't say the above, leasing becomes increasingly riskier, and you should more seriously consider a purchase contract.
As always, it pays to understand the details of your particular agreement. Read the contract. All of it. Besides making you an informed buyer, it will also drive your salesperson and finance person crazy. which you can consider a small bonus, right? (Just kidding.)
Good luck and enjoy that new car!
milocarrera · 10 years ago