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March 23, 2016
Q: Many area auto dealers and financial institutions are advertising some very good loan and leasing rates on their vehicles right now. If you are in the market for a new car, does it make more sense to buy or lease?
A: Leasing a car seems like a very attractive option to many car shoppers. The monthly payments seem so low, but it can be very misleading. If your objective is to save money then, leasing is NOT recommended for most shoppers since it can cost a lot more over the long run. There are, of course, exceptions and reasons why leasing may be a viable option for certain situations, but, for the most part, buying a car and keeping it for many years makes the most sense financially.
Q: What are some of the disadvantages of leasing a vehicle?
A: Leasing a vehicle is expensive in the long run. When you lease, you’re basically paying for the use of the vehicle for the first 2 or 3 years of its life — when the car depreciates the most. When your lease is over, you either have to lease another car or purchase one.
Another leasing pitfall is the limited mileage. Most leases have driving limits on average of 15,000 miles per year. Anything over this amount will be penalized at a very high rate. You can negotiate a higher mileage limit at the beginning of the lease, but you will normally have an increased monthly payment since the vehicles depreciation will be greater during the lease term.
Many people are surprised to learn that insuring a leased car can be more expensive than they thought. Most leasing companies require you to get a higher level of insurance coverage on the vehicle — usually up to $300,000 in liability coverage. This is mainly due to state laws that place liability on not only the driver, but also the owner of the vehicle (the leasing company).
The last major pitfall comes with the fees associated with leasing that you won’t find anywhere else. In order to lease, you’ll need to pay an acquisition fee of at least $400, and a disposition fee of at least $200 at the end of the lease. Sometimes called the bank fee, the acquisition fee is the amount charged by the leasing company to setup the lease.
Acquisition fees usually range between $250 and $1,000 (luxury vehicles are on the higher end). The acquisition fee can sometimes be negotiable, but it’s rare. Often time the fee rolled into the monthly lease payment. Otherwise, it will be due up front as part of the cash due at signing.
Most leases have a disposition fee ranging between $200 and $450. This fee compensates the leasing company for the expenses of disposing of the vehicle after you return it. (Basically, the cleanup and sale of the vehicle — usually at auction). A lease payment includes a small portion of sales tax each month that is attributable to the amount of principle reduction.
There are an assortment of excessive “wear and tear” fees that you could be liable for when you turn in the vehicle. Leasing companies charge fees for small dings and scratches — so you need to be extra careful taking care of the vehicle as you drive.
Q: Are there other drawbacks that may not be financial but are costly
in time and trouble?
A: Definitely, for one thing lease agreements can be very confusing. Most people don’t understand how leasing works. Unless you’re extremely careful and thorough, you could end up paying a lot more than you should.
An area that is frequently confusing when leasing is the residual value and what its impact is when the car is either kept or sold. If you want to keep the vehicle after the lease term expires, then you have to pay the residual balance and tax on that. If you don’t have the cash, then you have to finance it for several more years. Lease agreements do not state an APR, so it’s often confusing to compare the cost of a lease to a principle and interest payment when financed conventionally.
Lease agreements are typically very hard to cancel. Leasing is like signing a rental agreement. You can’t just walk away from it — there are stiff penalties if you do. With a lease, it’s practically impossible to terminate the lease during the contract period. Early termination can be very expensive. You may be responsible for substantial penalties or ALL payments under the lease. You could sell you vehicle to a private party and pay off the lease. If your vehicle has a high payoff, it may be very difficult to sell without incurring a loss. Selling the vehicle during the lease term could be an option if you want to avoid penalties for excess wear and tear or having exceeded the allocated lease mileage.
If you have less-than-stellar credit, leasing should not be an option. Most leasing companies require you to have a decent level of credit and a stable financial situation.
Q: So, if you’re the type of person who likes to keep your car for 5 years or longer, then leasing should not be a consideration?
A: If you like to stretch your dollars as far as you can, then you really need to be smart about car buying and make sure you choose a good reliable vehicle that you will keep for at least 5 years. An ideal car loan should be 48 months or less. Then after the vehicle is paid off, you’ll be driving the car payment free for as long as you desire (or as long as the car lasts). These days, new cars can easily last 150,000 to 200,000 miles without too many issues — especially with payment protection products and services like the ones that we have at HFCU. It’s a great feeling when you make your last car payment. Your monthly bills go down by several hundred dollars and you’re driving your car for free. With leasing on the other hand, you will ALWAYS have a monthly payment as long as you continue to lease.
Additional Resource: Auto Calculator: Should I lease or purchase a car?