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Leasing a car is much like renting a home. You pay the owner—in this case, the finance company—for the use of the car, but you do not own it at the end of the agreement period. Similar to any other financial decision, leasing may be the appropriate choice, depending on your lifestyle. And because current vehicle lease structures frequently offer buy outs at the end of a lease term, it can offer consumers the best of both worlds.
If you’re trying to decide between leasing or buying a car, here are a few things you should know about the leasing process:
1. Your credit score is a factor when you lease. While your credit score is an important factor whether you are buying or leasing, it may be harder to lease if you have less-than-perfect credit. You may have to make a larger down payment or opt for a car with fewer features and options in order to qualify for a lease.
While auto loans are available from banks, credit unions, dealers, and other financiers, you usually get a leased car directly from a vehicle manufacturer. Make sure you shop around with several manufacturers to get the best deal on a lease and to find the right vehicle that matches your needs and budget.
2. You will likely have a lower monthly payment when leasing than when buying with financing. One of the benefits to leasing is the lower monthly payment. When you lease, you pay the difference between the car’s selling price and its expected value at the end of the lease period—or the car’s estimated depreciation—plus an interest charge.
For example, if a $30,000 car would be worth $16,500 (its residual value) at the end of the lease, you’d make lease payments on the difference, or $13,500, and not the full $30,000. The lower the sale price, or the higher the estimated depreciation, the lower your monthly payment will be.
3. Leased cars are often covered under a warranty. Because of the short term of a lease, major repairs to your car will likely be covered under the manufacturer’s warranty for the duration of your contract. . However, similar to if you purchased the vehicle, you are still responsible for regular car maintenance, such as oil changes and tire rotations. Failure to properly maintain the car will result in high fees when you turn the vehicle in at the end of the lease.
4. Leases only last a short term (approximately two to four years). If you enjoy driving the latest model without the costs of owning, leasing could be the right scenario for you. Because you have to turn in your car every two to four years, you’re always in a new car with the latest safety, technology, and comfort features.
Short-term leasing also protects you from excessive depreciation. Buyers, on the other hand, may find themselves underwater on their loan, where the value of their vehicle is less than what they still owe, especially if they can only make a modest down payment.
With a short-term lease, you don’t have to worry about having negative equity in the car or making up for depreciation when you go to sell or trade it in. You can simply turn the car in at the end of the agreement period and walk away.
In the event you need to break your lease early, it’s important to understand the consequences of doing so. The best time to review these consequences is before you sign an agreement. Some consequences for breaking a lease that you may want to be aware of include: trade out options; penalty fees; and assume leases.
5. Leased cars usually have mileage limits. Vehicles depreciate so quickly that manufacturers that lease cars want to be sure you don’t add 200,000 miles to the car in four years. For this reason, leased cars typically have mileage limits of 10,000 to 15,000 miles per year. If you only use your car for local driving, leasing may be the right choice for you. If you have a considerable commute or enjoy long road trips, share that information with the dealer prior to making a decision about leasing or buying.
The decision to buy or lease can be difficult, but ultimately it will come down to your financing needs and personal circumstances. If you have money saved up for a down payment or larger monthly payments and want more freedom with your car, you may want to buy. But if you are fastidious about your car’s upkeep and want to drive the safest and newest model without the long-term costs of depreciation, you may want to lease.
Just be sure to do your research, shop around, and find a dealer that is willing to compare all scenarios to help meet your budget and your needs. Some automakers offer so-called sign and drive lease specials throughout the year. These can be great options, but they can also leave you paying more each month if you don’t read the fine print.
Jennifer Reid, Senior Channel Partner Manager with Equifax, contributed to this article.
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