Leasing is becoming more and more appealing to car and truck buyers as prices continue to rise, and vehicles become more and more complex. Smaller down payments and lower monthly installments are the main draw of a lease, but the ability to change cars more frequently also has an appeal. Technology and innovation in the car market is moving at such a pace that many people no longer want to own a vehicle for more than a few years.
Leasing leads to lower payments for a consumer because they are not financing the whole car, but rather the amount of the car’s value that they will be using up. The way this is done is by using a residual or buy-back figure that represents what the leasing bank thinks the vehicle will be worth at the end of the lease. For example, if a car costs $30,000, and has a residual figure of $17,000 after three years, the lease payment will reflect the cost of financing $13,000 over 36 months.
But what happens if the car is not worth the residual figure when the lease is over? What if it’s worth more? Nearly all consumer leases now are closed ended. This means that if the car is not worth the residual amount, the lessee can walk away and the bank must accept the loss. On the other hand, a lessee usually has a purchase option that allows them to capitalize if the car happens to be worth more than the buyback amount.
The big question with a lease is how many miles to opt for. Leases normally have a couple of mileage options, usually 12,000 or 15,000 miles, and it’s best to select one of these. It rarely makes sense to add extra miles onto a lease, even if you are sure that you will drive more. By doing this you are pre-paying for miles that you may not use. While 2-3 cents per mile can be saved by pre-paying, this has to be offset by the interest that will be paid on those miles if they are added into the payment. Another thing to consider is total loss. If the car is stolen or destroyed in an accident, the person who has been making a lower payment has spent less.
Another reason to consider a lease is that car makers often have better deals available on leases. Their goal is to introduce as many people as possible to the brand, and then turn them into loyal customers. This means that a lease from a manufacturer will not only offer low payments, but the end of lease process will usually be simple and hassle free.