Manage Your Life Like It's a Business
Who should lease as opposed to buying a car? Well, "The Rich" lease their cars because it's believed best to buy appreciating assets and lease depreciating ones. With rare exception real estate appreciates, particularly in the long haul. Automobiles always depreciate. That $300,000 Ferrari-Lamborghini-Maserati "What's Their Name Celebrity" is driving? Leased.
Leasing also makes sense, to some degree, for those who have limited financial resources. Leasing an inexpensive automobile can be an affordable way to have reliable transportation. A cheap lease being easier to find than a good, cheap, used car. If mom and dad have children who drive a cheap lease buys peace of mind. At least for the term of the lease.
Now, depending on the terms or length of the lease, usually between 24 and 36 months, your monthly lease payment is driven by the predetermined value of the car you're leasing at the end of your lease. That's what's known as the residual value. The higher the residual value the lower your monthly payment. Put cash down on the deal (not recommended) or a trade in and that monthly payment goes down even lower. Figure $20 per month for every $1,000 cash or trade in value you put down. Get $3,000 for that old Taurus plus another $2,000 cash and you've driven that lease payment down $100. To the monthly cash flow conscious buyer that's a deal maker.
One of the problems with leasing is the end of the lease. Let's skip the drama about damage and mileage overage fees for now but keep in mind they can be significant. At the end of the lease, you have three choices; lease again, buy the car at the residual value or buy another car (new or used). For the record, I've never seen a residual value that could be negotiated lower for a customer buy out. So, in most cases leasing amounts to little more than renting. Oh, and that old Taurus you traded in and the cash you put down? That value is all gone at the end of the lease. Unless you buy out the lease then you can rationalize, to some reasonable degree, that what you put down initially still holds water. If you don't buy out the lease then you have to make yourself comfortable that not only is that $5,000 gone but it went for nothing more than to give yourself an affordable monthly payment on something you rented. You also don't have anything at the end of your lease. My recommendation is that you hold onto your cash and make the higher monthly lease payment. More on this in a second.
What to do? First, look at the residual value and shop it around in the marketplace to see if buying the car out is an option for you. If the retail value is above your buyout (or "balloon payment"), then buying out your lease is a viable, efficient and wise option. If the balloon is larger than the retail price then it doesn't make sense to buy the car.
Next, look at buying a car and getting off the leasing-go-round. When buying a new car buying it with today's ridiculous rates with payments spread out over 60 months will have your monthly payments come in around the same amount as lease payments over 36 months. Sure, that car at the end of 60 months will be 60 months old but you're in a great position for months if not years of no payments if you keep the car. Older used cars with low mileage can be tricky to finance. Many lending institutions are either hesitant to loan money on older cars and charge a high APR. Others won't loan you money at all because they think the car too old. Best to shop banks as well as cars.
Another option is to purchase a gently used car. The values are incredible. Get a good APR over 36 months and you've bought wisely. I'm a car guy too and I'd love to drive a new car every two years if not sooner. Thing is, I love saving money more than I like new cars.
To Lease Or Not To Lease...THAT is The Question. If you're focused on making the best business decision you can, you're probably going to make a good decision. Best of luck!
Leasing also makes sense, to some degree, for those who have limited financial resources. Leasing an inexpensive automobile can be an affordable way to have reliable transportation. A cheap lease being easier to find than a good, cheap, used car. If mom and dad have children who drive a cheap lease buys peace of mind. At least for the term of the lease.
Now, depending on the terms or length of the lease, usually between 24 and 36 months, your monthly lease payment is driven by the predetermined value of the car you're leasing at the end of your lease. That's what's known as the residual value. The higher the residual value the lower your monthly payment. Put cash down on the deal (not recommended) or a trade in and that monthly payment goes down even lower. Figure $20 per month for every $1,000 cash or trade in value you put down. Get $3,000 for that old Taurus plus another $2,000 cash and you've driven that lease payment down $100. To the monthly cash flow conscious buyer that's a deal maker.
One of the problems with leasing is the end of the lease. Let's skip the drama about damage and mileage overage fees for now but keep in mind they can be significant. At the end of the lease, you have three choices; lease again, buy the car at the residual value or buy another car (new or used). For the record, I've never seen a residual value that could be negotiated lower for a customer buy out. So, in most cases leasing amounts to little more than renting. Oh, and that old Taurus you traded in and the cash you put down? That value is all gone at the end of the lease. Unless you buy out the lease then you can rationalize, to some reasonable degree, that what you put down initially still holds water. If you don't buy out the lease then you have to make yourself comfortable that not only is that $5,000 gone but it went for nothing more than to give yourself an affordable monthly payment on something you rented. You also don't have anything at the end of your lease. My recommendation is that you hold onto your cash and make the higher monthly lease payment. More on this in a second.
What to do? First, look at the residual value and shop it around in the marketplace to see if buying the car out is an option for you. If the retail value is above your buyout (or "balloon payment"), then buying out your lease is a viable, efficient and wise option. If the balloon is larger than the retail price then it doesn't make sense to buy the car.
Next, look at buying a car and getting off the leasing-go-round. When buying a new car buying it with today's ridiculous rates with payments spread out over 60 months will have your monthly payments come in around the same amount as lease payments over 36 months. Sure, that car at the end of 60 months will be 60 months old but you're in a great position for months if not years of no payments if you keep the car. Older used cars with low mileage can be tricky to finance. Many lending institutions are either hesitant to loan money on older cars and charge a high APR. Others won't loan you money at all because they think the car too old. Best to shop banks as well as cars.
Another option is to purchase a gently used car. The values are incredible. Get a good APR over 36 months and you've bought wisely. I'm a car guy too and I'd love to drive a new car every two years if not sooner. Thing is, I love saving money more than I like new cars.
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