Ben Todd | Apr 16, 2017 | 3
When Does It Make Sense To Lease A Car? Should I Get A Car Lease?
There are quite a few online articles and online money experts that claim you should never lease a car. There are a few more moderate money experts who say there are some circumstances where you should lease a car, but that you should mostly avoid leasing a car. This article offers good and financially prudent advice that explains some of the benefits of leasing a car, as well as discussing some of the downsides.
Be wary of so-called money experts who outright attack or overly praise something. In life, there is often something good and something bad in all things. Money issues are rarely black and white…right or wrong…yes or no…etc.
What Is the Difference Between Leasing and Renting
Think of renting a car like staying in a hotel. You may stay in a day, a few days, and even a month if you wish. Think of car lease like renting a cottage for the summer.
When you lease a car, it is very similar to buying it. When you buy a car, the aim is to invest money in return for value and use. You do a very similar thing when you lease a car because you are also investing money with the expectation of value and use.
The difference is that with a lease a car, you set a time limit on how long you spend getting your value and use from the vehicle. When you buy a car, the car sets the time limit on how long you enjoy its value and use.
Renting a car means paying a set amount every day for the use of the car. A car lease will typically last longer and you are only expected to pay the difference between the price of the car and what it is expected to be worth when the lease ends. The expected value at the end of the car lease is called the residual value.
When Should You Rent a Car?
If you need a car or vehicle for a short amount of time, then rent instead of buying or leasing. It is an especially good idea when you are on holiday or away from home. Renting is also a good idea when you have a single and/or one-off journey to take or task to complete. It is a fantastic idea if it helps you save money on a service, such as hiring a removal van and moving yourself rather than hiring a moving firm to do the work.
What Is The Lease Time Limit?
There isn’t a limit to how long you may lease a car if the leasing company is happy with the contract. Renting a car is a little different. Many rental companies will allow you to rent for a maximum of a month, but some allow for a rolling contract after the month is over, and some allow you to rent for as long as a year. A car lease is usually something that lasts months or years. A car-leasing firm is unlikely to allow you to lease a car for a few days or a few weeks. Many times, the costs you incur will help you decide if you should rent or lease a car.
For Example – You Need A Car For Six Months
If you need to lease a car for six months and you have two identical cars, one with a rental company and one that comes with a car lease, you need simply pick the cheapest option. At the end of the six months, you will have had the same value and experience whether you rent or whether you lease.* It is your job to figure out which is going to be the cheapest option and choose it.
* In our example, you would have the same experience. Obviously, there may be restrictions on how far you can travel with one rental company compared to the lease company and so forth.
You Make Monthly Payments for Around Three Years in Many Cases
When you get a car lease in the US, it tends to last around three years. The reasons are varied, but one reason is that the person who takes the car feels like he or she is getting the best deal.
Put yourself in his or her shoes and you can sort-of understand why he or she may feel like he or she is getting a good deal.
You get the new or nearly-new car for three years when it is in tip-top condition. This is when it is less likely to need work and very unlikely to cause you problems.
Usually, it takes you three or four years of having your purchased car before you are sick of the sight of it and want to change it. In addition, after three years, you are not stuck with car payments for a car you don’t want anymore, and you get to run out and pick another car to run into the ground for three years. For the person taking the car, it feels like a win.
Leasing Payments Are Typically Lower Than Renting and Financing Payments
If you are going to buy a car on finance, then you are probably going to have to pay for it over a long period of time. Even if your payments stretch for a great many years, they are still going to be pretty high every month unless you were smart enough to get a personal loan that has a low interest rate.
On many occasions, the cost per month to lease your car is less than what you would be paying per month on finance for the car. The cost of renting is also rather high, even if you are renting for thirty days with a big discount.
If you strike a good deal with your lease company, then you may enjoy a car with a lease for far less per month than what you would be paying if you had bought the car on finance or rented a car for the same amount of time.
Leasing Means You Do Not Have to Worry About the Trade in Value
Lease a car for three years and then take it back to the dealer…and that is the end of your transaction. You don’t have to care about the blue book value showing massive depreciation. When you have a lease for 3 years, you do not have to worry about how the car has become unpopular and how is has become impossible to sell. You do not have to worry about the trade-in value dropping by a high amount over the three-year period.
A Car Lease Means You Have No Car at the End of the Lease
Some people are overly concerned that they do not have a car at the end of the lease. They do not like the idea of giving a company money and then not having a car at the end of it, but if you had bought the car, then you would have had to pay more per month, and you would have had to pay more money for a longer period of time.
Think of your lease as if it is a bus pass. The money you pay on the lease every month is like the money you pay towards a bus pass for the month. You have your pass and you may use the bus twice today, once today, or six times on Wednesday. The choice is yours because you have paid your money, and the same is true of the car you have leased.
A Car Lease Is More Like Paying for a Service Than It Is Making a Purchase
Imagine that you are a pedestrian. You walk into your house and you have limited transport options. Now, imagine that you decide to hire a full-time taxi driver to work for you. He picks you up whenever you ask, he drops you off and so forth. You have to pay him a hefty fee every day for his service.
Now imagine that you pay less of a fee and only get his car. You are still getting a service because you are still getting from one place to another in a car. You are not paying for the car, you are paying for the ability to move from one place to another in a car. It is not about buying the car, it is about buying the service.
A Purchased Car Sees a Massive Drop in Value
Getting a car lease is not a bad thing. If you buy a new car, then it becomes worth a fraction of what it was worth when it was sat in the car showroom. When you take the car out of the showroom, the amount the car is worth goes down so much that you make an immediate and large loss on your purchase. The difference between the amount you pay and the amount you may sell the car for at that point (as you drive off the lot) is worth more than any three year car lease (and sometimes, the loss is worth 3 or 4 times more than the cost of a three year lease).
Lease Mileage Limits Are Often Unfair and Tricky
Buying a new car has a nasty downside (mentioned above), and some car lease deals have a nasty downside too. One of the nastiest surprises occurs if you deal with a poor quality leasing company. They set a mileage limit on your car, and they charge you a silly amount for going over the mileage limit. It is a nasty surprise that is usually perpetrated by poor quality leasing companies that have to keep changing their name so they can avoid their terrible Google+ and Yelp reviews.
Simply Find a Lease Company That Doesn’t Have Unfair Mileage Rules
Figure out how many miles you are likely to travel per year, and work out a rough estimate for how many miles you will travel during the course of your car lease. Once you have figured that out, you need to add between 10% and 15% to your projection.
You must now find out what your lease company’s mileage rules are. Is their limit less than the amount of miles you intend to drive? If it is, can you negotiate a change in your contract (checked and signed) so that you may travel more miles without incurring mileage charges? Can you pay more to extend the number of miles you are allowed to travel without being charged extra? If you are not able to negotiate such a deal, then move on to another car leasing company.
Strict Wear and Tear Rules Can Be Unfair
The companies that offer the lowest prices are often the most likely to try tricks such as the one mentioned above where they charge you high fees for going over their mileage limits. Another dirty trick they may try is to claim you have done more damage to the car than general wear and tear.
The fact is that regular wear and tear should include a few scratches here and there, and even a few indentations. It should include the interior looking a little shabby and the paintwork losing its glimmer and shine a little.
The trouble is that, “Regular wear and tear” is a very subjective statement. Some poor quality companies are going to try to charge you for a re-spray for every tiny mark, scratch or discoloration. These companies are trying to take you for every penny, and you need to fight them all the way. You also need to get online and tell the world via every review websites you can find.
Some Lease Companies Have Very Fair and Liberal Wear and Tear Rules
Do your research beforehand, and you will be able to find companies that have fair wear and tear rules and very liberal rules. There are some that will even consider rips in the upholstery to be regular wear and tear. They are more concerned with damage that occurs through improper use.
For example, such companies (the honest ones) may wish to charge you if the damage indicates you kept going off road in a car that is not an off-road vehicle. They may look for damage to the interior that suggests you have been carrying items that you shouldn’t and/or that you have been using the vehicle for business purposes when your car lease strictly says personal and private use. Do your research beforehand to separate the good leasing companies from the bad ones.
A 0% Financing Deal to Buy a Car May Lead to a Bigger Loss Than Leasing
Some people are going to tell you that you are a fool for leasing a car when you can buy a car and get a financing deal with 0% interest for the first year.
What these people fail to tell you is that you have to finish paying for the car, which may take years and will certainty require thousands of dollars.
You may end up with a car when the debt is paid off, but the money you have paid and the money you can recover from its eventual sale will still leave you wildly out of pocket.
A person who leases a car is also out of pocket, but maybe not as deeply as the person who bought a car on finance.
Lease Installments Will Eventually End
Your finance and rental installments will eventually end, but how they end is up to you. Your lease payments will end and the car goes back to the leasing company.
By the time your car financing/loan payments end, and you may have already sold or scrapped the car. Also, when you pay your lease, you are paying for a service, but when you buy a car, you are getting into debt. The debt you gain from buying the car may last the rest of your life if you are not careful.
Car Finance Payments Will Last Far Longer Than Car Lease Payments
Just to reiterate, there are plenty of reasons why buying a car is better that financing a car, but you have to remember that your car finance payments will last far longer that your car lease payments. When you take on a car (buy it), you are making a long-term commitment, whereas when you lease a car, you are making a pre-determined and pre-planned commitment of a certain amount of time and nothing more.
Leases Are Ideal for Businesses Where Deductions Can Be Made
If you are looking for the best reason to lease a car, then “For Business Reasons” is the best reason ever. If you lease and do not buy, then you avoid a whole world of accounting and budgeting. You do not have to worry about your capital assets, depreciation, maintenance, current and re-sale value, and all that other annoying stuff that comes with buying a business vehicle.
All you have to worry about is how much you are paying and the return on investment that you are getting from the car lease and the car itself. You can make a few deductions if you buy a car, but you may deduct up to 100% if you are leasing the car for business uses, and your worries about repairs are a thing of the past because the car should be in great working condition and ready to last for years. Deduct your lease payments through your business, and you have a great way to get around without breaking the bank.
Three-Year Leases Are an Acceptable Compromise
If you are a bit of a math wiz, you may have figured out that the longer you lease a car, then the less value for money you are getting. If you compare buying a car that lasts twelve years and depreciates to 10% of its original value, and a car that you lease for three years, you are going to get a better return on your money with the lease. The longer the lease extends, then the less value for money your lease becomes when compared to the car you purchased.
If you are not sure of how that works, (i.e. longer lease means less value compared to purchased car) then consider which is the best value for money: the car that is leased for 12 years or the car that is bought and lasts twelve years? Considering the total cost of the lease and the fact that you would have paid off the car within six to eight years, the car purchase is the best value for money in that case.
Six Year Leases Are Edging Towards Being Poor Value for Money
A three-year lease is probably the best value for money when compared to renting a car and when compared to buying a car outright or on finance. If your lease lasts six years, then you are riding a thin line between good and bad value for money.
After all, if you got into debt while buying a car, you would have probably paid it off before six years. At the six year point, you would have to return your leased car, whereas you would still have your fully paid purchased car at the end of the six year period. Plus, the purchased car would probably last another six years.
The car you leased for six years is not going to give you another six years for free, and after six years you do not own it, so a six year lease may not be good value for money.
Conclusion – Buying Is Not Always Better
As the introduction mentioned, there are plenty of articles that tear down leasing a car, but as you can see by this article, there are plenty of very good and economically sound reasons why you should lease instead of rent or buy a car. You have probably read plenty of articles that say leasing a car is a bad idea, and now you have read this article that is loaded with reasons upon reasons why leasing a car is a good idea.
You have now had the chance to consider both sides of the issue so that you may make a more prudent and pragmatic decision about if you should buy, rent or lease a car.