Question: I am looking for a new car. The salesman suggested I think about leasing because the payments would be a lot less. I don’t know anything about leasing. Do you think it makes sense?
Answer: Monthly lease payments are often a lot less than the monthly payments you would make on a typical car loan. However, there is a lot more to leasing than reducing your payment. I generally steer people away from leasing because, when you crunch the numbers, leasing is usually a lot more expensive per mile driven than buying.
An auto lease is not a purchase. When you lease a car, you enter into a long-term agreement with the car’s owner (known as the lessor) to use the car for a period of time in exchange for a monthly payment. The payment compensates the lessor for the vehicle’s expected depreciation plus a rent charge to cover other expenses the lessor incurs in the transaction, including the cost of financing the purchase of the vehicle.
Leases usually last two or three years. At the end of the lease period, the lessor almost always sells the vehicle. To protect the car’s resale value, the lessor places certain restrictions on how the car can be used and how it must be maintained. If you decide to lease, pay attention to the lease’s mileage restriction (usually between 10,000 and 15,000 miles per year). If you exceed your limit, you will be charged a fee when you return the car based on the number of miles you have driven over the limit. If you drive a lot, this mileage charge can add up quickly and you may want to think twice about a lease.
Take time to understand the maintenance requirements especially who is responsible to pay for normal maintenance and what constitutes excessive wear. You may face other charges at the close of the lease if the lessor deems the vehicle has suffered excessive wear and tear or if the vehicle has not been properly maintained.
As with a purchase, many lease terms can be negotiated, so don’t be afraid to ask for what you want. Above all, read the fine print carefully before you sign anything. Make sure the lease agreement reflects the deal you want. If you decide later you don’t like the deal, a lease can be very expensive to break.
Whether or not leasing is right for you depends on what you want. If you want to always drive a newer model car with minimal hassle and you don’t mind making payments, a lease might make sense. However, if you want to build or preserve your wealth, there are better options.
A more financially savvy strategy is to buy a slightly used car, maintain it properly and drive it for as long as possible. Look for good deals on cars as they come off lease. These cars have low mileage, are well maintained, and dealers often include extended warranties to cover any unforeseen problems. Over a ten-year period, your cost per mile could be as much as 60 percent lower using this approach compared to the cost per mile of a new lease every three years.
Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.