There are many online calculators that will compare a lease payment to a traditional loan payment. What customers should realize is that leasing and financing are similar only in that they both have a monthly payment. Customers should determine what method (financing or leasing) will support their typical style of car ownership and not which one has the lowest payment.

Is leasing a good fit for you?

In almost every scenario, leasing a car will provide the customer with a lower payment (the exception is when the lease allows for very high mileage). When considering a lease, the critical element you should consider is how often you buy and trade your vehicles. It is important that you be truthful with yourself. For example, if you buy a new car and then trade it every 3 or 4 years, you should consider a lease.

On the other hand, if you drive a car for 6 to 10 years without trading, leasing may not be a good fit and you should finance the vehicle. Customers who keep their vehicles for many years will amortize their monthly cost over time. For example, if you financed a car for $300 per month for 5 years and then keep the car for a total of 10 years, your cost per month has gone from $300 to $150 per month.

$300 per month x 60 months (5 years) = $18,000

$18,000/120 months (10 years) = $150 per month

Conversely, if a customer is financing the car, it could cost him more if he trades his vehicle every 3 years. Because new cars lose a greater percentage of their value in the first couple of years, the monthly payments will not be sufficient to “pay down” the principal balance fast enough, and unless the customer made a large down payment, he will be in a position of Inequity.

This means that after 3 years, he will still owe more than the car is worth and when he attempts to trade the vehicle for a new model he will have to pay that deficit. Unfortunately, many customers will trade their cars every 3 years in the middle of a car loan and get caught in a cycle of transferring the inequity to their new car. The customer will be making a high payment on a lesser car.

A majority of customers fall into this category because they don’t like the idea of leasing. They will say “I don’t like to make payments on something I will not own in the end.” However, they don’t own the vehicle when they trade it after 3 years: the bank does.

Do not get caught comparing the payments between a lease and loan without first considering these facts. During negotiations, it is easy for dealers to offer a payment that may fit your budget, but not your trading cycle, and in the end, that will cost you a substantial amount.

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