8/2/2013 2:15 PM ET|
When leasing a car is the right option
Usually, your best option is to “buy and hold,” but not in these three scenarios.
Car leasing is back -- big time.
One in four new vehicles driven off car lots so far this year was leased, according to Edmunds.com, putting the auto industry on track to break last year's record 22%.
That's a stunning rebound from five years ago, when the credit crunch led Chrysler to announce it would stop leasing cars, and other manufacturers dramatically cut back.
The trend is being fueled by aggressive deals that have driven down the cost of leasing. The gap between the average monthly lease payment of $418 and the average auto loan payment of $464 is the widest since Edmunds.com started tracking these numbers in 2003.
Manufacturers are targeting younger drivers, who "seem to have a pay-as-you-go philosophy," said Philip Reed, Edmunds.com senior consumer advice editor. Many young drivers view cars much the same way they do cellphones, Reed said: as pieces of technology to be replaced quickly with more advanced versions.
"If you lease, you get the most recent technology," Reed noted, citing rapid improvements in safety features, fuel economy and navigation systems.
So has leasing become a smart financial option? Sometimes, the answer is yes.
This was news to me, because when it comes to cars, I long have held that the cheapest option was to pay cash for a slightly used one and drive it for at least 10 years. That's still true, but there other considerations that sometimes favor leasing. Some examples:
When you want an electric car. Consumer Reports has never been a big fan of leasing, pointing out that "buy and hold" is a better financial proposition for most drivers. But it makes an exception for plug-ins.
"With electric cars, it's pretty cut and dried," said Consumer Reports automotive expert Eric Evarts. "Why lock yourself into the first generation of technology?"
Today's typical electric car has a range of about 75 miles and takes four to five hours to charge fully, Evarts said. But technology is improving constantly, with better batteries that have more range and charge faster.
"We don't know what's coming next," Evarts said. "The only thing we do know is they're going to be better."
The tax credits for electric cars also favor leasing, Evarts said. The $7,500 federal credit -- plus any credits your state might offer -- dramatically reduces the cost of the car, reducing lease payments, as well as resale value.
If you buy today's electric car and try to sell it a few years from now, you'll be offering outdated technology to someone who can get a better car, plus a tax credit, by buying new, Evarts said.
Manufacturers are promoting $199-a-month lease deals on many electric models, with down payments of $999 to $2,000. If you need more range, you can get a Chevrolet Volt, an electric car with a gas engine for backup, for $269 a month with $2,399 down.
When you can afford the luxury of a new car every few years. This is a very small percentage of drivers -- much smaller than the number who are leasing now.
The problem with buying new cars is that they're expensive (duh), and too many people wildly overspend when they opt for new vehicles. (For more, read "Your car is wrecking your retirement" and "The real reason you're broke.") The commonly given advice that you should limit car payments to 20% of your take-home pay works only if you have cheap housing and no debt. Otherwise, you're likely to spend too much on your wheels and shortchange other important areas of your life.
If you want a new car you should:
- Be on track with retirement and college savings
- Have a fat emergency fund, enough to cover six months' worth of expenses
- Be adequately insured (health, life, property, disability)
- Have no consumer debt, such as credit-card bills
If that describes you, and you want to indulge in new wheels every few years, then leasing likely would be less expensive than buying.
You're still spending a lot for your transportation, though, and you would save tons of money over your lifetime by committing to a car for longer periods. In my book "Deal With Your Debt," I figured that someone who kept his cars for a decade apiece would save $250,000 compared with someone who bought a new car every five years. Those who change cars more often are costing themselves even more.
When the lease is a one-off. The problem with paying cash for a car is that sometimes you don't have the cash when you need the car.
Let's say you're fresh out of college, your savings account is on fumes and your hoopty just died. You could lease a 2013 Honda Fit for $210 a month with nothing down for 36 months and start saving up for your next car.
That last part is important, because otherwise you could wind up a serial leaser with a never-ending car payment. And that's not a good deal for most of us.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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The vast majority of people have no clue when it comes to leasing... it can be a real money saver.
There are advantages and disadvantages to leasing, just like there are advantages and disadvantages to buying. If you're a smart and savvy person when it comes to cars, 'deals', and dealership tactics, you can actually get a better deal on a lease than a purchase. In addition, most drivers don't realize that many dealerships make MORE money on used cars than they do on new vehicles. It's especially true if you're flexible on the car you want.
ASK the dealer, "Which cars on your lot are you motivated to sell or lease?" If the dealer wants to move a car off the lot, you'll get a MUCH better deal without a lot of negotiating. I just did that with my recent car. I called 3 dealerships and said, "I'm willing to pay XXX dollars for this specific car on your lot, and I want to lease it with XXX payment, will you make that deal or not?" If they're motivated, you'll get the exact deal you want as long as you're not being unrealistic. I got a $5k discount, a reduced out-of-pocket buy-down, and numerous incentives from the manufacturer. I got the car I wanted at the price I was willing to pay.
And, if there is any way to lease a car within your business - DO IT. If you must use a car to visit clients, or see people you do business with on regular basis, and you drive the car 80% of the time for business use, a lease is the cheapest way to own a car because of the tax advantage. That does not include the distance you commute to your primary place of business however.
I'm an IT systems integrator; once I leave my office in the AM, I'm driving for business purposes. It's MUCH easier to deduct the lease payments on your taxes than it is to buy a car and depreciate it. I've been leasing cars for 15+ years and it's an unbelievable tax advantage, plus I can drive a much nicer vehicle because the payments are always lower than a purchase. Yes, I realize that most people can't do this, but if you CAN, do it! Let Uncle Sam pay for much of the cost of that new BMW you'd love to drive!
But even if you can't deduct the payment, think of a lease as a 3 year test drive. If you truly love the car, and you don't put huge mileage on it, you can buy it at the end of the lease. I've done that twice with low-mileage lease cars when it was time to turn it in. Why give the dealership that additional profit? Buy the car and sell it yourself if the car is worth more than the buyout! Or, just keep it.
Personally, the cost of repairing and maintaining a used car meets or exceeds the cost of constantly leasing a new car. Plus, your cost NEVER exceeds the payment + fuel. Regardless of plug-in, hybrid, diesel or gas, it's ignorant to think that efficiency will not decrease with age and newer models will always be increasing MPG with the stricter federal standards. A simple 30MPG to 40MPG gap on an older model car will cost nearly $10,000 in gas over a decade, considering $3.89 a gallon, 15 gallons per week.
This statement is absurd: "In my book "Deal With Your Debt," I figured that someone who kept his cars for a decade apiece would save $250,000 compared with someone who bought a new car every five years."
Maybe if you're comparing purchasing a used Kia as opposed to leasing Maseratti's. The cost of repairing newer cars is rapidly increasing as electronic and mechanical components are getting more advanced.
My wife and I both lease cars, have ZERO out of pocket expenses except for fuel and wiper blades, have a fixed car payment, and have new cars every 3 years. The truth is, unless you can afford to have tens of thousands of dollars cash on hand to purchase new vehicles and or maintain used vehicles at today's prices, leasing makes sense for many more people than you think..
For the last 8 vehicles I have leased. All depends on your needs. Leased a Subaru Outback loaded,zero down for 199 a month bought it at end of lease to trade for my next lease of a Chevy Equinox ls which cost me a hand shake. My new lease payment is only 245 a month including taxes. I am a low mileage driver so you must know the game or else you can get burned very easily. I like the idea of no maintenance except for oil changes and tire rotations.
Much better to buy a used Fit, save all that money, and drive it til it drops.
Also, check the stats, the more expensive the car, the more they are leased. All those top of the line MBZ, BMWs and Audi's you see......most are leased for a business deduction.
Maybe-for me a 24 month lease, purchasing xtra mileage upfront given that I drive at least 20,000 miles yr even using rent cars for long out of town trips. I drive a luxury car that is out of warranty within about 2 years and doing the math, the last car I leased would have required an aditional $10,000 down to get the same monthly payment, a longer finance periodwith substantial our of warranty time.
This way, I always have a new car, under warranty and maintenance, excluding tires, BMW, My business use is about 85% so I get some tax benefit that helps offset costs.
If I purchase I am out of warranty within 2 years, have a 100,000 mile vehicle after 4 years and who knows what repair costs could be after the warranty period.
Works for me, not for everyone.
I plan on driving her to her cost of maintaining her doesn't make sense.
9 years without a car payment is a pretty sweet deal. I made a bundle with her getting me back and forth to work.
Paying monthly car payments every month are not my cup of tea. But I do understand how it could work for some people.
I live in an East-coast city without a car (never owned one and when I need a car occasionally I rent a Zipcar or Car2Go); however, next year I will need to move to the mid-west for 9-11 months due to a spouse's work assignment there. Afterwards I will be coming back to the city. I will need a car in the mid-west location where I will be based but will want to get rid of the car when I get back to the city.
I'm trying to figure out what is the best option: buy a car (a clunker? a new car?) and then sell it when I get back to the city (people in the city here don't really buy clunkers) or lease a car for the lowest amount of months possible? If I have to 'keep' a car for a few months (up to a year) after I return to the city that would be fine (to limit the loss/hit I expect I will take on my finances. I also need to consider that I will need to travel cross-country with this car twice to go there initially and then to get back after the assignment is over.
I welcome anyone's input (I appreciate chop1966's point about business expenses; I am self-employed, my spouse is not, but this is something I will look into).
Another thing (and this probably won't apply to many of the U.S. readers) is that leasing a car means no MOT since the car is brand new (if your are UK based like me you will know how much of a pain MOT's can be.
So for the most part I would have to say that leasing is often the best option if you have the finances to afford it. Either way its cheaper than buying a car from new!
On saying all this I used to work for a leasing company - www.firstvehicleleasing.co.uk - so my opinion may be a little biased...
Its never a Good Idea, any financial planner will tell you that. Just the car dealers who make so much money from them they can afford flood the airwaves with car commercials, ever notice how almost every commercial break has cars cars and more cars ? besides having to put down THOUSANDS of dollars as a down payment, they lose over 30% of their value the moment you sign the papers, ( car dealers will never tell you that or the truth ) better have EXTRA insurance in case you wreck it , insurers pay used car prices so you can be on the hook for thousands more, and BTW don't drive it more then 190 miles a week cause fleecing companies will get you for up to 35 cents a mile you drive over so no long distance trips. and at the end of the fleece you have nothing and are essentially out of the money it would cost you to buy a new car.
The only ones that could benefit are the self inflated ego type who think strangers are impresses with them cause they have a new car which in reality is a high priced rental
cars depreciate quickly, and they are a bad place to put cash...with a leese you have more options
as you near the end of the leese. you can sell it yourself, just give it back or buy it.....another advantage to leasing is that if you get into a money jam you can pay a fee and return the vehicle
to the leasing company, something you can't do when you buy them...most of the time it is not worth
buying the vehicle at the end of the leese because you end up with to much money in the vehicle because of double interest...in the past i have leased for 5 yrs and sold them myself in 4 yrs, and
this works out well.
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