Compared with the purchase of a new car, a car lease is a lot cheaper. You won’t have to pay the same amount each month, unlike car financing. The only downside is that you don’t own the vehicle. Once the lease is over, you have to return the car. You can continue the lease or buy the vehicle. How do you decide to lease a car?
To determine what’s best for you, you need to sit with a pen and paper and do the math. Start with your old car, write down the purchase price and average maintenance you put it, the tax and registration fees, and the interest you paid over the year (if you had a loan). That’s your total cost of ownership.
Now subtract the vehicle selling price from the total cost and divide the result by the number of months you owned it. That’s the amount you paid every month for the vehicle from your pocket.
I am putting my example here.
We bought a BMW in August 2013 (a 2009 model) for $24,000. We paid on average $500 every month (because it was a BMW!) on maintenance. It was an all-cash deal, I didn’t pay any interest. I traded it in for $7,500 in April 2017.
So, we had a depreciation of $16,500 in 44 months. Per month depreciation was $375, now adding $500 depreciation, I paid whopping $875 per month on that car. Had I been leasing all these years, I would have only paid $500-$600 every month.
This was one of my worst financial decisions to date. Now, how you decide to lease a car?
If you’re still okay with this condition, it might be time for you to start asking around. Before doing so, you need to ask yourself some important questions first.
The responses to these questions will help you decide if leasing a vehicle is the right choice.
Can I afford the cost?
Yes, leasing a car is cheaper than financing a new one. Despite that, you could still pay an amount that could eat up a significant portion of your salary.
If you have existing loans to pay or you still have other financial issues to deal with, it might not be time to lease a car.
You have to wait until you’re financially ready before doing so; otherwise, you won’t be able to pay, and your penalty will skyrocket.
Yes, buying a reliable and good conditioned used car makes sense when you drive it for many years. Buying a new car may not ever be profitable due to the big depreciation that happens the moment you drive out of the dealership.
You save either by having a lower down payment or by not having auto insurance and associated costs.
What are my needs?
You decide which car to rent based on your needs. If you’re single and you only want a car for regular use, a compact vehicle would suffice. If you have a lot of kids, you might want a minivan.
For business purposes, you might also need a different type of vehicle. Once you list all the features you want in a car, you can make a shortlist. Select the car model to lease from that list.
Which dealer should I trust?
It’s also crucial to find a dealer you can trust with car lease deals. Read reviews or ask friends who recently leased a car. Check the terms and conditions for leasing vehicles.
Compare the choices and determine which of them would be perfect for your needs.
Once you sign a contract, you will be with the same dealer for several years. You don’t want to get tied up with a dealer you dislike or don’t trust.
Is buying a better choice?
Buying a car has many associated costs. Registration, tax, interest charges on loan, and the opportunity cost on the down payment.
If you paid $10,000 on a car downpayment. You’ll lose 2% (savings account) to 10% (optimistic stock market return) return on that $10,000 for many years.
Another huge cost is vehicle maintenance and parts. Easily close to $1,000 a year for most cars, on an average basis.
If your car repair goes wrong you have more money to spend and more headache to withstand.
You have to ask yourself again if you’re confident about the idea of leasing a car. You will spend a lot each month to pay the lease, but you won’t own the car.
If you dislike that idea, you might want to reconsider purchasing a vehicle. You can also compute the cost before you finalize your decision.
In the end, you will find car lease deals that would be good enough for you.
Can you sell the car to its real market value?
I hate to admit but I failed at it each time. I have sold 4 cars so far. Two were having engine troubles so had to be junked. Fixing the car was costlier than the KBB value. So, I put ads on Craigslist and sold them off.
The other two times I traded off at lower than the KBB suggested third party value.
When you’re in such a situation like I was, it makes the case for leasing a car a bit stronger. You’re losing out tremendously on the car devaluation.
Don’t rush the process. Wait until you find the right responses to your questions before you decide to sign any documents.
Do the financial calculations and determine what makes sense. This is how you decide to lease a car.
You also have to ask questions for clarification; otherwise, you will sign a deal with details you might not like. Consult with your family too, since they will also use the car you will lease or buy.