Shopping for a new vehicle can be a fun and rewarding experience, but only if you make the right decisions for your needs and budget. Here is your chance to get behind the wheel of the newest and latest additions to the Toyota, Nissan, Lexus, or Kia lineup. These cars come with so many incredible new safety features and technology that stepping behind the wheel almost feels like piloting a spaceship, and there are plenty of attractive and customizable car options for you to choose from.
When you do find the car you prefer, you have two options to allow you to take possession of the vehicle right away. You can lease the car or purchase the vehicle. Both options have various pros and cons that should be considered before signing on the dotted line.
When Leasing Makes Sense
Leasing has been very popular with consumers in the past few decades, particularly when it comes to luxury cars like those made by Audi, Lexus, Mercedes, Porsche, and BMW. In the last few years, however, more compact cars, sedans, and SUVs have entered the new car lease market. With low finance rates, consumers realize that leasing allows them to drive away in the car of their dreams with a good and affordable deal.
To lease a new car with an affordable rate, you will be required to have excellent credit. You won’t own the vehicle and will be required to return the car when the lease terms are up, unless you decide to renew.
Leasing does come with a variety of important benefits. For one, you will typically pay less in monthly payments and taxes when leasing over those who decide to buy. Many individuals enjoy the cost savings that come with leasing, along with the minimal upfront fees and the fact that they can drive away in the newest car with the latest safety technology. Those who lease also never worry about the warranty expiring as opposed to purchasing a car, where you may be required to add-on expensive extended warranties. You also can purchase the vehicle at the end of the lease, which is otherwise referred to as the “Lease to Purchase” option.
Lease to Purchase
Here are the reasons why lease to purchase would make sense to some.
For individuals who plan to finance a vehicle with little to no money, the monthly payments can be substantially higher as of 2019, as fees have been steadily climbing in the past few years. Lenders typically offer car loans with spans of 48 and 60 month terms, which include interest rates that aren’t much help for lenders seeking lower monthly payments. There are some options offered by a limited amount of lenders, such as loans with 72 and 84 month terms, but the interest rates are usually much higher, making these loans riskier and unappealing for most car shoppers.
Car shoppers who decide to lease have incredible flexibility over those who buy a car outright. For example, lease holders can take advantage of lower upfront costs and monthly payments. Furthermore, a lease allows individuals to walk away from the lease contract after its terms are complete with no obligations whatsoever.
If, after leasing a vehicle, an individual decides to buy the car, they can exercise the option to purchase their lease and either pay it in full or finance the buyout amount, with the lender stretching the balance over 4 or 5 years.
Some may argue that lease to purchase is a horrible method that would cost way more in the long run. Others may claim that the lease payments are akin to throwing money right out the window. These claims couldn’t be further from the truth.
Granted, there are some lease structures, like business equipment leases, that don’t make sense for the average consumer, but a manufacturer’s car lease is different.
98% of all car leases offered by dealerships are known as “Closed End leases,” which means when the lease contract matures the lessee doesn’t have any other obligations to the vehicle other than returning it.
The opposite would be an “Open End lease” which keeps the lessee on the hook to purchase or re-lease the vehicle until the residual amount has been fully paid. Not to worry, however, as you’ll never find a dealer offering an Open End Lease.
Here are other reasons why leasing is not a waste of money. When you lease a car, you are paying a fraction of the car’s total value. For example, let’s say the residual is 60% for the car you plan on leasing. This means you will pay 40% of the car’s value over your 3 year lease.
On top of 40% of the car’s value, you will pay your monthly tax and interest rate, known collectively as the “Money Factor.” To keep things simple, let’s just refer to this number as the interest rate.
The interest rate on most leases is usually much lower than if you were to finance the vehicle for 48 or 60 months. So if you paid 40% of the lease during your lease contract and now want to “buy out” the vehicle from the lender at 60%, you will pay 100% of the vehicle’s cost (and not 101% or 99%). The residual is set in stone and will be listed in black and white on your lease contract.
This method may not be exercised by many dealerships because car leases have become so affordable, which also means that automakers have been increasing the leasing market share over the past few years. When these leases mature, hundreds of thousands of these leased vehicles flood the used car market, which effectively lowers the market value for all the other vehicles in the pre-owned market.
This means that lessees will never have to worry about resale value. They can simply lease another new and much safer vehicle with a full bumper-to-bumper warranty.
Buying a New Vehicle
When you purchase a car, you own it. You will be required to pay more upfront with fees including the sticker price, taxes, registration, and other associated costs, but you can finance the car for a certain amount each month.
What to Consider with Leasing vs. Buying?
When you lease a vehicle, you can trade your new car in for another every few years. When you buy, you’re stuck with your car until you decide to trade or sell your car for another at current market value. You may also have to pay taxes again on the new vehicle with no tax credit between your trade value and the new vehicle sales price, depending on which state you live in and the local tax laws.
When you lease, you are also always protected by a vehicle warranty, whereas purchasing a car only affords you a warranty for a limited time. You can extend your car warranty, but this will add to the costs of vehicle ownership.
Other Considerations When Deciding Between Car Leasing and Vehicle Buying
Buying a car allows you to drive your car for as many miles as you want with no restrictions. This isn’t always the case with leasing, as you are often limited to a certain mileage as per your lease terms. However, keep in mind that, just because you purchased your vehicle so you can rack up as many miles as you wish, the value of your car will reflect those miles if and when you decide to sell or trade your vehicle.
No one really thinks of the accumulated mileage until they’re back in the market for a new car. The more miles you put on your leased vehicle, the higher your payments due to the reduced value of the car because you went over the predetermined and expected mileage amounts.
If you want to end your purchase financing agreement or lease agreement early, both methods can cost you, but not as badly as you may think. You need proper guidance and assistance with your auto broker, who will keep your best interests in mind. If you have an experienced auto broker, you can rest assured that the professional knows the market well, which means that your exit strategy of your current purchase or lease may sting far less.
However, breaking your lease or finance agreement with the intentions of completely walking away from your obligations can lead to court costs and ruined credit, along with vehicle repossession.
We suggest speaking with your car broker, who can help you find an affordable solution when exiting your current lease or purchase finance agreement so you can get into another vehicle, if you choose to do so.
Most people think that getting out of a lease contract is difficult and expensive. However, leases will always have a balance from the leasing company. Your car broker will determine what that amount would be to determine what he or she can get as a market value on your leased vehicle on the open market. The difference your broker can get for your car and the amount you owe to the leasing company would become the new total that could potentially be rolled into your new car.
When leasing, you’ll have to fulfill the terms of your lease if you want to drive a new car. Keep in mind that some car lease agreements come with end-of-lease costs, which can include a Disposition fee or Return fee, any damages or excessive wear beyond the Leasing companies reasonable amount or mileage overage incurred.
If you can no longer afford the lease or finance payments, some auto brokers and auto dealers will purchase the vehicle at wholesale costs, allowing you to walk away, but not always.
Some leasing companies will allow you to transfer the lease to another individual if that person qualifies for the lease just like you did before you signed. You can also sell the car to a private individual and use that money to pay off the leasing company if you can no longer afford the payments, but this process can be tricky, and you must time it correctly. That’s because you’ll have to collect the money from the buyer before you can hand over the title, which may cause some private buyers to balk.
Purchasing a car allows you to customize your vehicle any way you like. You can also drive your new car as long as you want without having to worry about mileage restrictions. If you decide to finance the cost of your vehicle, you may have higher monthly payments over those who decide to lease a car, but you’ll have equity you can use to buy a new car after the loan terms have ended.
Leasing a vehicle lets you get behind the wheel of a new car, even a luxury car like an Audi or Lexus, with low rates and monthly payments. You may have mileage restrictions and end-of-lease fees to contend with, but you can trade the leased car for a new leased model in just a few years. In addition, you are always protected by a warranty when you lease as opposed to ownership, which only gives you a limited warranty that can then be extended for additional fees.
Are you in the market for a new car?
As you can see, you have a big decision to make. If you have excellent credit, you might find leasing to be the most affordable and convenient option. If you want to own and customize your car, financing the purchase price of a new car may be the better decision.
Contact Boston Motorcars, your local Pasadena and Torrance area auto brokers, to discuss car leasing or car buying with terms you’ll find convenient and fees you can afford.