Should I Lease? Part 1 of 3 ~ What’s all the fuss about leasing? Why would I lease my vehicle? What is it anyway?
You can’t hardly watch TV, listen to the radio or read an article these days without one car company or another touting the latest and greatest lease payment. But should you lease? Should you stick with the traditional loan? What are your options, and why do so many people talk about leasing anyway? Over the next few weeks, I’ll discuss several aspects of this mysterious topic.
For today, let’s start with the basics. Just what is leasing? Basically, a lease is simply another way to finance a car. We all know some people pay cash for a vehicle, and we already know how that works. Other people take out a loan with their bank, credit union or through a lender the dealership connects them with. Again, we are familiar with this. Still others use their home equity line to pay for a car. I don’t typically recommend this option, but that’s a discussion for another day. Leasing is very much like financing, but with options built in at the middle. You can decide after only a few years if you want to turn it in, sell it or keep it. At the end of the lease term, your obligation is over, if you want it to be.
Leasing simply works like this. Based on recent history, the lease company figures what the vehicle should be worth at the end of the lease. That dollar amount gets set aside. Your payments are on the difference between what you pay for the car, and that amount that has been set aside, plus the cost of funds (interest). In the most basic terms, that’s a lease. Many people have the misconception that leasing is like renting, but this couldn’t be farther from the truth. The idea behind a lease is to pay just the depreciation on the car, rather than paying for the entire thing. They know what it should be worth at the end, guarantee to you that it won’t be lower than that amount, and month by month, you pay the balance down to that amount. After that, you decide what happens next.
The biggest advantage to a lease (other than affordability) is that leasing gives you options. At the end of the lease, you are completely in control of what happens. You can choose to turn the car in and walk away from the car, the manufacturer and the dealership, if you so desire. You can sell the car to a dealership or to someone you know, and potentially make some money at the end. Or you can choose to continue to drive that car, if it is still the car you want to drive for a few more years.
The key to these options is the dollar amount we discussed earlier that has been put aside. The lease company figures out that a car like this, that is this old, with this many miles is typically worth this amount to a dealership. This figure is called the “residual.” By establishing the residual value of the vehicle, you now know the projected depreciation of your car or truck. Your monthly payments are not going into the wind, as if you were renting the vehicle. Every payment is paying down the balance closer and closer to the residual. At the end of the lease, you have paid your vehicle down to that dollar amount.
In the past, leasing gained a bad reputation, with some companies writing “open end” leases. They got to arbitrarily pick a number out of the air to be the residual. If the car wasn’t worth that at the end of the lease, that was your problem. This put a lot of people into a lot of hurt, and caused them to never want to hear the word “lease” again.
These days, leases are “closed end” contracts. Here’s where the magic happens. When you lease your vehicle, the residual is guaranteed. That means if the car isn’t worth what the lease company figured it would be, that’s not your problem – it’s theirs. You get to hand them the keys and go get something else. No questions asked. No strings attached. Thanks very much. It’s been fun, but I’m going to drive (insert vehicle name here ) now.
The most common complaint I hear from people is due to a lease that wasn’t set up right. A lease should be structured to fit how you drive, rather than trying to fit your driving into a lease. If your lease doesn’t include enough miles, you will feel like you shouldn’t drive the car, even though you are making a payment every month. I would rather set up the lease to have more miles than you need, so you feel like you have miles to burn, and don’t have a fear of “going over.” If you drive more miles than you contracted for, the lease company will bill you for the extra miles. This means if you drove 1000 miles more than you paid for in your payments, they will charge you about $150 at the end to compensate for those miles (check with your dealer for lease end cost – I used 15 cents per mile). Additionally, at the end of the term, if you have a dent in the fender, or a hole in the bumper, you should have that fixed (insurance?) before turning it in, or they will bill you for fixing it. Your insurance company probably paid you for it anyway, or at least should have. Nothing scary here. If you owned the vehicle, and were looking to trade it in or sell it, those things would effect the value anyway, so this is not a cost exclusive to a lease. It’s just more visible because it becomes a bill, rather than a deduction from value.
Next time we will start to look at the question “is leasing right for me” and the implications and ramifications it may have for typical customer situations. Who should lease? Who shouldn’t lease? We will also discuss the lease end options I alluded to earlier.
Mankato Motor Co.