Is leasing a car a good idea? Well the answer is very simple. Just ask yourself a few questions and look at the lease that is being offered to you.
First, ask yourself these questions:
Do you trade in your vehicles every two to four years?
You have to be honest with yourself on this one. I have been a car salesman for over fifteen years and many times when I ask this question, my customers will say “I have in the past… but I’m probably going to keep this one”. Then three years later they are looking to trade it in.
If you truly keep your car for six to ten years, leasing will be an inconvenience for you. Not to mention the longer you keep your car the less it cost. For example, let’s say you pay $30,000 for your new car and trade it in four years later. That car has cost you $625 every month of ownership ($30,000 / 48 months= $625). If you keep the car for 10 years the car now cost you $360 every month of ownership.
Of course, as a car gets older there is a chance that it might require some repairs. That risk of extra repair cost will have to be factored in to your calculation. That’s brings to another question.
Do you drive a lot of miles?
Most leases are structured between 10,000 miles and 15,000 miles. The lease company will calculate the end value or (residual value) of the leased car based on how many miles you have accrued. If a car has excessive miles for the model year its value will be diminished exponentially. In other words, “high-mile” leases rarely are financially worthwhile unless you have some business or tax benefit.
Is the lease supported with a subvented program?
Next, look at the lease that is being offered by the car dealer. Most leases that are advertised by the vehicle manufacturer are probably good. They want to advertise a low monthly payment; therefore they will offer leases that could have a high residual and/or low money factor. These are called “sub-vented” leases.
For example, every year Mercedes and Lexus will have a “Winter Event” when they advertise low payments on many of their models. These leases feature low money-factors and high residuals. They are essential buying the sales by offering less than market value rates; it’s a lot like 0% interest on a traditional car loan.
Finally, make sure your lease is a “Closed-End” lease. This means the lease company must purchase the vehicle for the residual value on the lease agreement. Today, ninety percent of car lease are “closed –end” but there are some “open-end” leases still being offered. An open-end lease means that the customer must pay any difference between residual value and the market value of the car at the end of the lease term. Open end leases will have a very low monthly payment, but the customer will almost always have to cough of some extra cash at the end of the term.You can read all about Sub-Vented Leases, Residuals and Money-Factors in our Lease Tools section.