Leasing a car comes with a unique set of responsibilities and advantages compared to buying. When you lease, you take on the obligations of car ownership – such as insurance, registration fees, inspections, and legal liability – but the dealership or leasing company retains ownership of the vehicle. While this arrangement might not suit everyone, leasing offers distinct benefits, especially when considering new vehicles. A significant draw for many, particularly those looking to manage monthly expenses, is that lease payments are typically lower than loan payments for purchasing the same car. Furthermore, leasing allows drivers, especially older adults, to access the newest technology and safety features more frequently, as lease terms often align with typical car ownership cycles. With standard lease terms around 36 months or 36,000 miles, they often coincide with the duration of most car warranties, potentially shielding you from unexpected repair costs during the lease period.
boomers shopping for a new in with salesman in a dealership
Image: Senior couple considering car leasing options at a dealership, discussing terms with a salesman.
For those considering leasing for the first time, the prospect can be even more appealing if you have a used car to trade in. Trading in a vehicle can significantly reduce your upfront costs and lower your monthly lease payments, making it an attractive option. However, it’s important to remember that this trade-in advantage is a one-time benefit at the start of your lease and won’t be available when you lease again in the future.
The lower monthly payments associated with leasing are a powerful incentive. In fact, statistics reveal the growing popularity of leasing. Approximately 31.3 percent of new car transactions were leases in the first half of 2018, a notable increase from 25.7 percent during the same period in 2013, according to data from Edmunds.com, a reputable auto-research and shopping website. This trend underscores the increasing attractiveness of leasing for a significant portion of new car drivers.
To illustrate the financial appeal of leasing, let’s consider a practical example. Imagine you are interested in a 2018 Honda CR-V, a popular SUV model. The vehicle has a price of $33,500, which increases to $35,000 when factoring in taxes and other fees. You have a trade-in vehicle valued at $10,000 and are seeking a deal with no initial payment upon signing the lease agreement. If you were to finance the purchase with a three-year loan at a 5 percent interest rate (an average rate at the time of the original article’s writing, according to Bankrate.com), your monthly payment would be a substantial $749. Conversely, leasing the same vehicle for three years could reduce your monthly payment to approximately $287.
This stark difference highlights the potential for significant monthly savings with leasing. To achieve a loan payment comparable to the lease payment, you might need to extend the loan term to as long as eight years. While you would own the car outright after completing an eight-year loan, it’s worth questioning how long you would realistically want to keep the same vehicle. Leasing offers a shorter-term financial commitment and the opportunity to upgrade to a newer vehicle sooner.
When considering a car lease, several key factors deserve careful attention to ensure you make an informed and financially sound decision.
Choosing the Right Vehicle for Leasing
In a car lease, you essentially pay for the vehicle’s depreciation over the lease term. Therefore, selecting a car that holds its value well can significantly lower your lease payments. Vehicles with strong resale value depreciate less, resulting in a lower capitalized cost – the basis for your lease payments. While this strategy might narrow down your choices, focusing on vehicles known for retaining value can be financially advantageous.
Brands like Toyota consistently rank high in resale value. For example, in Kelley Blue Book’s 2018 awards for best resale value, Toyota models like the Tacoma midsize pickup, Tundra full-size pickup, and 4Runner SUV occupied the top three positions. These vehicles were projected to retain approximately 65 to 70 percent of their original value after three years.
Kelley Blue Book and other automotive resources provide depreciation forecasts and resale value data categorized by vehicle segments. This segmentation allows you to identify top-performing models within specific categories, such as sedans, minivans, or SUVs, aligning your lease choice with vehicles known for better value retention. Beyond Toyota, models like the Jeep Wrangler and several pickup trucks also demonstrate strong resale value. Even within specific car segments, high-performance sedans like the Subaru WRX can hold value relatively well, ranking among the top vehicles for resale.
According to Ronald Montoya, senior consumer advice editor at Edmunds.com, “Vehicles that are popular and have good resale value — SUVs, Toyotas,” are generally the most financially prudent choices when considering a lease.
Understanding the Lease Deal Structure
Car leases are known for their complexity, involving “a lot of variables,” as Ronald Montoya aptly points out. Navigating these variables effectively is crucial to securing a favorable lease agreement.
Firstly, remember that the price of the vehicle you intend to lease is negotiable, similar to buying a car. However, be prepared for potential resistance from dealerships. To gain leverage in price negotiations, research the market value of comparable new models in your local area. Websites like Truecar.com, kbb.com, and Edmunds.com offer resources to assess market prices. Additionally, obtaining a purchase quote from the dealership’s internet department before visiting the showroom can provide a solid starting point for price discussions, making it more challenging for salespeople to inflate the price during negotiations.
The negotiated price, along with applicable fees such as sales tax and dealer documentation or transaction fees, and the vehicle’s projected value at the end of the lease term, collectively determine the fundamental amount you will repay over the lease period. This total amount is referred to as the capitalized cost, or “cap cost” in lease terminology. Understanding how this cost is calculated and what factors influence it is essential for evaluating the overall value of a lease offer.
