Decide if Auto Leasing is Right for You/ March 1st, 2022
The average person drives about 14,000 miles per year. How many miles do you drive? It’s important to know before signing an auto lease contract.
There are undoubtedly benefits to leasing a car. For one, drivers can enjoy a luxury vehicle for relatively low monthly payments. That means the latest in safety and technology is always within reach. Second, because leases are short term, the car often is under warranty throughout the life of the lease. That means fewer costs for maintenance issues. All lessees have to worry about is a monthly payment plus gas, which is enticing for many drivers.
But there is more to consider. And there's not always a clear answer as to whether leasing or buying is best. It really comes down to lifestyle choices.
If you don’t drive a lot per year, like having a new car every couple of years, or if you just don't want to spend that much per month, then leasing might be an option for you.
Lease or Buy?
While car ownership has hidden costs in maintenance, so does leasing.
Drivers who exceed their yearly mileage allowance must pay penalties at the end of their lease. And those who are hard on their cars—you know who you are—may have to pay out-of-pocket for those repairs once the car is returned. Those little mistakes can add up to an unexpected and unwelcome fine that more than offsets the perceived financial benefits.
In 2021, 24% of cars were leased, according to Statista.com. From a financial perspective, leasing might cut monthly car payments in half—but you always have a car payment. Buying is better if you can pay off the loan as quickly as possible. That way, after the car is paid off, you can enjoy a period of time without a monthly payment without being concerned about a mileage limit.
In 2021, the average finance term of purchased vehicles was about 6 years, and the average age of traded-in vehicles was 12 years.
That means the average car owner would experience a six-year period with no monthly payments—and they'd have equity in the vehicle they owned. Lessees who fall in love with their vehicle and wish to purchase it at the end of the lease do not get to apply that down payment or those years of monthly payments to the purchase price.
Negotiating a Lease
Often, consumers focus on one thing when considering a lease: the monthly payment. But many factors make up that monthly payment.
There are five components lessees should be aware of when negotiating a contract:
- Capitalized cost: the actual cost of the vehicle
- Residual value: the forecasted value of the vehicle at the end of the lease term
- Length of term: common leases run from 12 to 36 months
- Mileage allowance: the total amount of miles allowed on the car each year
- Money factor: the interest rate of the lease
In a lease, consumers can't negotiate a lower interest rate with their lender—it's a set amount. Lenders determine residual value, and there's no industry standard.
A lower mileage allowance will mean a lower monthly payment, but consumers must keep those end-of-contract penalties in mind if they drive over their allowance.
So where can a lessee negotiate? The selling price. Without negotiating this number, lessees could overpay for a car without even knowing it. A lower selling price means a lower monthly payment. Find appropriate pricing information on Edmunds.com and conduct your own research. Call different dealerships to see what price the car is selling for on their lots and use that information in your negotiation.