You have the urge. You can already smell that new car smell. It’s time to for something new! You hit the car lots and – pow! – you’re hit with sticker shock.
There has to be a way to get the new car you want. Then someone whispers in your ear – LEASE!
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. Before you sign that lease contract, make sure you determine if a lease is right for you.
Check out and think about these key factors before making a decision.
Is a down payment required to get that low monthly payment?
Low lease payments often come with a hefty a down payment - as much as thousands of dollars.
A down payment on 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. 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.
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. Remember that equity you might build with a loan? With a lease, it’s GONE.
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?
Do the mileage restrictions fit your lifestyle?
The lower the monthly lease payment, the fewer miles you will be able to drive during your lease. Advertised leases with low payments usually allow 10,000 or 12,000 miles per year. Exceed that limit, and you’ll be hit with excess mileage penalties. These charges can 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.
Think about your daily commute. It’s not unusual to drive 20-30 miles to work each day. At this distance, you can easily accumulate over 10,000 miles per year just traveling to and from work, leaving just a little mileage for other activities.
Think about other things that could affect your driving patterns in coming years.
- Is a potential transfer or change of employment likely?
- Are you contemplating moving to a new home or apartment?
- Could you even end up in a new relationship that affects the miles you drive? Long distance relationships can wreak havoc with your mileage.
No one can see the future, 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.
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