Ask an Expert: Buy or Lease?
Dear Kirk: I’m looking into options for buying a new car. Is lease-to-own a solid option, or is it better to just bite the bullet and buy a vehicle?
Kirk Says: So let’s answer a few questions to determine whether leasing might be in your future.
Do you prefer to drive a brand new car every two or three years?
Do you drive less than 15,000 miles per year?
If you answered yes to these two questions, then you may be a good candidate for a lease. Now all we have to do is make sure that we are getting a good lease deal. To do this, we want to look first at the residual value at the end of the lease. The higher the residual value, the lower your monthly payment will be.
A simple way to approximate your lease payment is to subtract the residual value from the new price of the vehicle, and then divide it by the number of months in the lease. For example, a $35,000 new car has a residual value of $23,000 after 3 years. The approximate lease payment will be $35,000 – $23,000, divided by 36 months. So that is $12,000/36 = $333.33 per month.
Don’t forget there will be some additional fees, sales tax and interest that will make the actual monthly lease payment a little higher. So when shopping for a lease, look for cars that hold their value the best. A 50 percent residual value is about average, while 65 percent is about as high a residual value you will find among three-year leases.
The next factor to consider is the interest rate, also known as the “lease factor” or “money factor.” Shop around at different dealerships, and make them compete for your business.
In addition to negotiating the interest rate, you can try to negotiate fees like the security deposit, acquisition fee and disposition fee.
One last thing to make certain that you understand is the details of your lease contract. Make sure you can answer these questions:
Can you transfer ownership of the lease before the end of your contract? If so, what will it cost you to do that?
What happens if you exceed the mileage requirements of the lease? How much will excessive mileage cost you? If you exceed the maximum mileage, will they charge $0.05 per mile? Or $0.20 per mile?
Leasing can be a very rewarding option for the right person, but as with every major purchase in your life, the more informed you are as a consumer, the the experience (and your options) will be. Whether you decide to lease or buy, enjoy that new vehicle!
Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.