So you finally landed that office job where you have to put on a suit and use pointless buzzwords. Here's the problem: All your coworkers drive fancy cars. You want to "look the part" and not show up with your rusted-out beater, but you can't make the payments on, say, a Bimmer or a Lexus. Or can you? Welcome to leasing, my friend.
Leasing gets a bad rap because "financially responsible" people think you're just throwing money away, and that it's really nothing more than renting a vehicle without any ownership. That is one way to look at it. The other way is this: Instead of buying some dilapidated shit-hole out in the boonies and worrying about constant home maintenance and repairs, you most likely rent your apartment, happily paying those fees because you get to live where you want, and it makes you happy. Vehicle purchases are rarely about pure logic and frugality; if they were, we would all be driving cheap Corollas we bought off of Craigslist.
You've been dreaming of getting that really nice car for awhile, and now that you're making the big bucks, it's time to make it happen. Here's how to forget the haters and lease that dream car.
Now, before you get all excited, you need to determine if this is really the best choice. Leasing isn't for everyone, and it really depends on your situation. Here are some questions to consider:
How much do you drive? The first thing you need to figure out is how many miles you'll drive in a year. If you're under 15k, then you're good to go, but if you're commuting several hours a day and racking up the miles like a truck driver, stay away from leasing. The reason is that you will be charged a fee (an average of $.35) for every mile you go over your allotted amount. So if you are allowed 36k miles in three years but end up driving 48k, that extra 12k miles will cost you about $4,200.
Are you bothered by having a car payment? Some people hate car payments: They can't wait until their bank note is free and clear so they can drive without that burden. Leasing sets you up for a perpetual cycle of car payments, if this isn't your thing, back out now.
Do you take care of your car? No, this isn't a trick question, but you know your habits better than I do. Does your car acquire dings, scratches, and other damage at an alarming rate? Do you have a history of spilling food, coffee, mulch, body parts, etc. in your interior? If you return a lease car in worse condition then when you got it, be ready to get nickle-and-dimed for every little thing. If you see your vehicle as more of a "beast of burden" than an expression of yourself, leasing isn't for you.
Say you've had your eye on one of those German luxury sedans for awhile, but they go for about $40,000, and even with $5,000 down, you couldn't afford the $630-a-month car payments. You can, however, swing a $360 monthly tab if you lease that BMW.
So why is it so much less? There are several factors that go into calculating the payment, but to keep it simple, t hink of it this way: You are only using the car for a fixed period of time and miles, for example three years and 36,000 miles. Then you give it back. With a lease, you pay for the part of the car you use. So if your BMW costs $42,000, but by the end of the lease, it will theoretically be worth $22,000, that 20k difference divided out over three years is the primary portion of your payments.
Well ... not really. When you see those advertisements promising you monthly payments of only $299 or whatever, know that that is usually contingent upon a down-payment; how much of one varies from brand to brand, but most of your luxury cars are going to require 10 percent. There are also the sales tax, title, and tag fees to contend with—none of the ads will include these because they vary from state to state, but they must be added to the cost of the car. But here's some good news: In most states, you are only paying the sales tax on the part of the car you are using. In the case of the BMW, your local tax rate would be applied to that 20k lease portion, not the 42k vehicle cost.
Check your credit
The first step is have excellent credit; all those "lease specials" you see on the manufacturer's website assume Tier 1 (excellent) credit. Just like a car loan, you will have an interest rate. On a lease, it is usually called a "money factor," where the better your credit, the lower the rate. I've seen lease payments jump $50-$100 per month because the customer had a low credit score.
Know the sweet spot.
Remember that part about residual value? Every automaker has a different "sweet spot" to maximize this resale point and keep those lease payments low. For some it may be 27 months; for others it may be as high as 48 months. Most leases fall in the 36- to 39-month range. But ask your dealer to run you several options, as taking shorter or longer terms might be more budget-friendly.
Compare Different Cars
Just because two cars may have the same price doesn't mean they will have similar lease payments. It comes down to how strong the residual value is and how willing the dealer is to give a discount. The closer the gap between the residual value and the sale price, the lower the payment.
Sometimes, more expensive cars actually lease better than cheaper ones. Not long ago, I had a client that wanted to lease an Audi A3, but thought she couldn't afford it, so I suggested the VW Golf, which is a mechanically similar car. But the lease deals on the Golf absolutely sucked at the time: A $28,000 Golf was leasing for more than $400 a month, while the $35,000 Audi was only $415 with the same miles, time, and down-payment.
Also be aware that just because a car is a discounted model year leftover, doesn't necessarily mean the lease will be cheaper.
Once you've decided on a specific car, you can shop a lease almost the same way as you shop for a purchase. Contact some dealers in your area and tell them the down-payment, miles, and lease term you're looking for on a specific car. Have them send you quotes and compare, but be sure all taxes and fees are included. You may be surprised how different the payments can be from one dealer to the next.
Most people just turn the car back in at the conclusion of the lease, then start the process again for another leased vehicle. However, you do have the option to purchase your car at the "buy out" price established when the lease began. Of course, you will be making payments on essentially a used car for next several years. For example, if you just paid $360/mo for 39 months on that BMW 3-series, that amounts to almost $14,000 in lease payments, plus whatever down-payment you used (most likely about $4,000) for a total of $18,000. Now you have to purchase a $22,000 used BMW and add in tax, title, and tags to this purchase. So if you are looking for the best path to long-term ownership, leasing is not the way to go.
Tom McParland is a professional car-buying consultant and a writer for Jalopnik's Car Buying sub-blog. If you have a question, a tip, or something you would like to to share, drop me a line at AutomatchConsulting@gmail.com.
Image via Shutterstock.
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