Can’t Buy Me Love
Over the past weeks, we’ve been talking about how much we LOVE our cars, and buying and how to watch out for predatory situations and make a good deal for yourself. But we’ve only talked about buying. There is another option out there that can work for many people and that’s leasing.
Leasing has become a bit more common, with one in four “vehicle acquisitions” being a leased vehicle. It’s basically a long term rental, much like renting an apartment. You have to put down a deposit, and any damage you cause is taken out of that deposit when the lease is up.
Now I’ve never leased a car, but I have some clients who have done so, some with more success than others. Leasing a car is one of the places you want to be sure to read your contract. That way you know exactly what you are responsible for, and what to expect at the end of the lease. When you lease a car, two very important things to pay attention to are the lease term, or number of months or years, and the mileage allotment. There was one client, a nice lady who used up all of her mileage allotment by the end of year two on a three year lease. She spoke to the dealer, and they told her that she could buy the car at the end of the lease, so not to worry about it. So she kept driving. Unfortunately, at the end of the lease, she was not able to get a car loan, and the extra miles she drove ended up costing her a LOT.
Another client ran into a similar situation. Both the husband and wife had leased vehicles. Then she got a job where she had to commute much farther than she had to previously. They ended up buying another car for her to use for work so that they would not go over on mileage on the leased car. Other clients have had leases and everything went fine, so there’s that.
So which is better, buying or leasing? As with many things, there’s no one right answer. Financially, they’re about the same. Especially if you are a person that trades in for a new car once your car is paid for. When you do that, you are basically paying for the depreciation plus interest; it’s the same thing you pay for on a leased vehicle.
One of the terms you may not have heard before is residual value. That’s what is going to tell you how much depreciation you’ll be paying for. The higher your residual value, the lower your payments will be over the term of the lease. However, that’s also the price you’ll pay if you decide to buy the vehicle at the end of the term. Another term you may not be familiar with is money factor. That’s going to essentially be your interest rate. Take the money factor times 2400 to convert it to an interest percentage.
One of the biggest advantages of leasing is that if anything major goes wrong, it’s the dealer’s responsibility to pay for it. Leases will have different requirements as far as who takes care of what maintenance, so be sure you know what the lease allows or requires. And as we saw above, the number of miles you have on your lease can be very important. If you need to adjust the number of miles over the standard amount in the contract, it’s going to cost more.
And as always, make sure the payment and the money you’ll have to pay up front are in your reach and won’t put you in the hole monthly.
That’s a lot to keep track of! If you need help figuring out the money side of leasing, the counselors at the Center for Financial Resources are here to help. Contact us at 1-888-258-2227 or visit our website at www.LssSD.org to make an appointment.
Written by Sylvia Selgestad, Financial Counselor and Educator
LSS Center for Financial Resources
Consumer Credit Counseling Service | Housing Resources | Sharpen Your Financial Focus | Financial Fitness Education
705 East 41st Street, Suite 100 | Sioux Falls SD 57105-6047
605-330-2700 or 888-258-2227
Strengthening Individuals, Families & Communities