The Truth About Leasing: 5 Myths on Leasing a Car
At the outset, leasing a car can seem like a no-brainer. Lower payments, and you'll get a brand new car again in two or three years. However, many consumers report that they're unhappy with their leases and vow "never again". They've suffered penalties for excessive mileage, lease end fees, and feel they have "nothing to show" at the end of their lease.
So, what's the verdict? Should you lease or not? It's important to get the facts straight first before heading to the dealership. Here are five commonly heard myths about car leasing.
Myth 1: Leasing is Renting:Many people equate leasing with renting, but this is not the case. Leasing finances the use of a vehicle. You are paying for the amount that the car's value that will depreciate during the length of your lease before you return it to the dealer.
Myth 2: Buying a Car is a Better Long Term Investment:Not necessarily. Many people believe that purchasing a car is a better long-term investment. In some cases this is true, but since lease payments are almost always lower than purchase payments, smart lease customers can take that savings and choose more profitable investment options, such as mutual funds or stocks that have the chance of increasing in value.
Myth 3: Leasing is only for the Rich: This misconception probably originates from the origins of car leasing itself. Originally, leases were intended for businesses, but auto finance companies soon expanded their programs to offer leases to regular consumers. And while it's true that 75 percent of luxury cars are leased rather than bought, 20 percent of all new cars, trucks, SUVs, and vans are leased. Leasing is especially popular during times of economic trouble when consumers are looking for affordable ways to meet their transportation needs.
Myth 4: Good Deals are Impossible: We've all heard stories of people misunderstanding their lease agreements and being unhappy with the results, but its definitely possible to negotiate a good deal on a lease if you know the right jargon. Some terms to pay attention to:
- Capitalized Cost: The capitalized cost is the vehicle price. This can be negotiated just like the price of a purchased vehicle.
- Money Factor: This is the interest rate you are paying on the car. It is expressed in a fraction of a percentage point. You can convert a money factor to an interest rate by multiplying by 2,400 regardless of the length of the loan.
- Residual value: The residual value is the value of the vehicle at the end of the lease. A realistic residual value will make it easier to sell the lease, trade your vehicle mid lease or buy the vehicle at the end of the lease.
Myth 5: You Can't Actually Drive a Leased Car Anywhere Without Hefty Mileage Fines: Any lease agreement will include a number of miles you can drive a year without paying a penalty of 15-21 cents per mile at the end of your lease. Deals can be negotiated to allow you 10,000, 12,000 or more miles per year, so try to make a good estimate of how far you drive on a regular basis to see what's best for you. Keep in mind that if you buy a car, putting higher than average miles on the vehicle will decrease it's trade in or resale value.
As you can see, what you may have heard about leasing is not always true. For many people, leasing can be a great way to get a new car with low monthly payments and little to no money down. Be sure to do your research and figure out what's best for you to ensure that you'll be happy with your lease agreement.