Auto Leasing

The Pros & Cons of Auto Leasing

Does it pay to lease an auto? There is no simple answer. You have to consider the price of the car, the interest rate used by the bank or finance company and the residual value. Then you have to take other potential expenses into account.

Auto leasing is popular because it requires little money down and requires monthly payments lower than you would pay if you were financing the car at the same interest rate. I believe some auto manufacturers subsidize lease deals to move cars that are either too costly or unpopular to be sold easily.

However, there are some factors that come into play that might make auto leasing a bad option. First, determine the yearly mileage allowance the lease contains. It can be as low as 10,000 miles per year. If you go over the limit, it will cost 10 to 20 cents a mile. If you’re under, you get no credit. If you think you need extra miles, negotiate for them upfront, when they're cheaper.

Then there’s excess wear and tear. If you the kind of driver who collects dents, if you plan on carrying tools or materials that can tear the interior or if you have a set of messy kids, you might want to buy. You will be responsible for paying to have the car restored to the condition the lease company expected when it assigned the residual value.

Also you will probably have to return the car with four matching tires in good condition.

When shopping for a car, try to avoid the salesman’s questions on how you’re going to pay for it. You want to settle on a price before you get into financing. This is especially true with auto leasing, where things get complex pretty quickly. If the salesman knows you’re looking to lease, he won’t even mention price anymore. He’ll just emphasize your monthly payment.

The lower the price of the car, the lower your payment will be. This is also true of the residual value, the amount the auto leasing company thinks the car will be worth at the end of the lease. The higher the value, the lower the payment. However, if you might consider buying the car at lease end, you will then have to pay more for it.

The final key is the interest rate assigned to the contract. Just like an auto loan, a rate will be assigned, but you’re unlikely to know what it is and it can vary widely from company to company.

Just because you want a lease does not mean you should not shop around. You’ll get a wide range of quotes depending on the dealer and the auto leasing company.

You will probably get the best leasing deals from the finance arm of the manufacturer of the car you want, e.g. GMAC, Toyota Motor Credit etc. They are likely to assign higher residual values and lower interest rates. Also, as I mentioned before, they are likely to be subsidizing lease deals for certain models from time to time.

Your credit score will come into play also. Most of the best auto leasing deals you see advertised are only available to those with the best scores. Otherwise expect to have to put some money down.

When I was working, I could drive a $65,000 Lexus, BMW or Mercedes off the lot without putting a cent down. Now, I’m sure a leasing company would require me to lay out several thousands dollars for the privilege.

When the lease is up, its best to have the car inspected and fixed by your own mechanic. It will cost less than if you let the dealer do it. Also you will be able to buy new tires, if needed, for much less than a dealer would charge.

If you have fees owing, the dealer might waive them if you enter into a new lease. If you do so, make sure he isn’t rolling over the charges into the new lease.

The lease-buy calculation is complicated. Here is a buy versus lease calculator.

I always enjoyed leasing a new car every three years. The warranty never run out and in most cases normal maintenance was part of the deal. Other than gas, insurance and the monthly payments, it was a carefree way to drive. Of course, I had nothing to show for it when the lease ran out.

  | Top | Loans | Home |