The average person drives about 12,000 miles per year. How many miles do you drive? This is just one question to answer before you commit to an auto lease contract.
There are undoubtedly benefits to leasing a car. For one, drivers have the opportunity to experience 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 no hidden 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, says Ronald Montoya, consumer advice editor at Edmunds.com in Santa Monica, Calif.
"If you're someone that doesn't drive a lot per year, you want to be in 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," says Montoya.
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 2015, 25% of cars were leased, according to Edmunds.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, according to Montoya.
"The goal is to keep the car until it's paid off and then you can enjoy a period of time without that monthly payment," he adds.
David Bakke, financial expert at MoneyCrashers.com in Norcross, Ga., agrees.
"Buying a car usually involves a down payment and your monthly payment is typically more expensive than leasing," he says, "However, if you choose to keep your car after it's been paid off, you can save a lot of money. You can also drive it as much as you want."
Edmunds.com found that the average finance term of purchased vehicles in 2015 was about 6.5 years, and the average age of traded-in vehicles in 2015—bought and leased—was about eleven years.
That means the average car owner would experience a six-month 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.
Often, consumers focus on one thing when considering a lease: the monthly payment. But many factors make up that monthly payment.
According to Jared Kalfus, vice president of data licensing for Black Book, which provides used and new vehicle value services, in Lawrenceville, Ga., there are five components lessees should be aware of when negotiating a contract:
"Each of these play a role in determining the monthly payment of your lease," Kalfus says.
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.
"Most lenders calculate the residual value by referring to a valuation guide book such as Black Book, but lenders may use other references or their own formula in residual forecasting," Kalfus says.
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, says David Jacobson, CEO and president of GrooveCar, an auto-buying resource for credit unions, in Hauppauge, N.Y.
"When a salesman for a dealership is going to lease a car, they don't talk about selling price—they talk about monthly payment," Jacobson says. "The reason that's dangerous for the consumer is because it takes away their negotiating power."
It's plain and simple: A lower selling price means a lower monthly payment.
"You need to ask the question, 'What is the selling price of the car?' " Jacobson says. "Do not be fooled. Always negotiate your selling price while you're negotiating your monthly payment."
Consumers can find appropriate pricing information on Edmunds.com and should be sure to conduct their own research. Some dealerships are more aggressive on pricing than others and their in-stock selection could affect price as well.
In leasing agreements, there's also often a down payment. Montoya advises to shoot for $1,000 or less and never even consider paying as much as $5,000. That's money you'll never see again. Bakke advises consumers against these common leasing pitfalls as well.
"Keep the lease as short as possible to avoid ever having to pay an early termination fee," Bakke says. "When negotiating the monthly payment, be sure the dealer doesn't simply lower it and then extend the time frame of the lease."
What it all comes down to is that consumers must know what they're agreeing to before signing on the dotted line.
"Being able to consult with your local credit union will give a potential lessee the proper guidance on each of these components," Kalfus says.
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