3 Questions to Answer before Signing That Car Lease

The timing is right for a new car.  Your trusted friend has taken you everywhere for the last several years but is starting to wheeze, squeak, and sputter.

Right on cue, your eyes begin to wander to advertisements you never noticed before.

They promise a brand new car with enticingly low payments. Chances are, those are lease payments advertised, leading you to ask “Should I lease or buy a car?”

A lease is a good option for some drivers.  Rather than taking out a loan to acquire a new car, a lease allows you to drive for a pre-determined period. Rather than paying for the whole vehicle, you pay for the term you will be driving it. That usually results in lower monthly payments than you could get with an auto loan. But the restrictions of leases may not work for you. Here are three questions to answer before signing that lease agreement.

1. Is a down payment required to get that low monthly payment?

The payments you see advertised are often that low because you are required to make a down payment. Down payments can be thousands of dollars. A down payment for a lease is different from a down payment on a loan. With a car purchase financed by an auto loan, the down payment establishes equity in your car. Equity is the portion of the car that you own. With a lease, you will never own any portion of your car.

The down payment is an upfront payment that would otherwise be part of your monthly lease payments. When the lease terminates, your down payment is not returned to you. With a loan, the down payment is retained in part or whole in the value of the car. This equity can be valuable when you sell or trade for a new vehicle. Equity also increases the possibility that you could refinance your loan to eliminate more costly debt.

Think twice before making that lease down payment. How much will it deplete your savings available for an emergency? Spread the down payment across the number of monthly payments to see how much your “real” monthly payments would be. Is it worth using your funds this way for something you will not own?

2.  How restrictive is the lease mileage allowance?

As a rule, the lower the monthly payment, the fewer miles you will be able to drive during your lease. Low payment leases usually allow 10,000 or 12,000 miles per year without incurring excess mileage penalties. Excess mile charges typically range from $0.15 to $0.30 per mile over the limit of your lease. If you’re over just a little, it’s not much of a problem.  Miss your mark by a couple of thousand miles and that can be a large amount to have to pay at the end of the term.

With the average commute of a U.S. worker currently at about 19 miles each way, you could easily rack up nearly 10,000 miles per year just travelling to and from work. What's left is just a little mileage for other activities.

Don’t rely solely on your past mileage history to determine if the mileage allowance is sufficient to meet your needs. Take time to think about how your driving patterns will change in the coming years.

3.  What changes could occur in your life that would dramatically change your driving needs?

This is an important consideration. Unlike a car loan in which you could sell the car or possibly refinance in the case of an emergency, it can be difficult to exit a lease.

Many leases today are not transferable. That’s understandable from the lease company’s point of view. They made an agreement with you based on your credit qualifications, not another person. If you are considering a lease, it’s best to assume you will be locked into it.

What could happen to make that mileage restriction a problem for you?

• What are the odds that you will have a job transfer or new employment in the next few years that would lengthen your commute?
   
• Is there a move in your future? Moving into a new home can drastically change the miles you will put on your car.
   
• What else could unexpectedly happen? This is a wide open question. Something as simple as a new relationship can affect the miles you drive. Could you suddenly be driving many more miles to spend time with the love of your life?
   

No one has a crystal ball, but it makes sense to think through the possibilities before committing to a lease.

Don’t jump into a lease without evaluating all of your options.  A car loan is the best option for many.

With a car loan:

• You maintain the flexibility to sell the car and pay off the loan at any time.
   
• You build equity as you make payments on your car loan. At the end of the term, you have an asset that is worth something.
   
• You can have a time of “no payments” when you pay off your loan and continue driving the vehicle.
   
• You can get a monthly payment to meet your budget by choosing the term that works best for you.

A lease may be right for you. A loan may be a better option. Take the time to compare and make the smart choice.
 

 

 

© Genisys Credit Union and www.genisyscu.org, 2019.  Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content

 

 

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