Lease, finance or cash; which is the best option? As with everything in the automotive world, it depends. While that may not seem helpful, it's the truth and in this section we will go over the practicalities and benefits of Leasing. In previous posts we demystified [LINK] financing and why [LINK] cash deals may not be your best option. In this article, we will give you all the information to decide if leasing is best for you.
If I lease, I will never own my vehicle
This is possibly the most common concern expressed by buyers. The funny thing is, most finance customers rarely pay out their loan before moving into their next vehicle. As a result, THEY never own their vehicles either - at least not outright. They have a buy-out amount remaining which, depending on the timing, can actually be more than the vehicle is worth in trade. Not a happy place to be, and certainly not a reason to avoid leasing.
So, how do leases work?
A lease is really just a type of finance method in which the dealership holds title on the vehicle while you pay to drive it. Put another way, you only finance the portion of its value that you agree to use during a defined period.
This period is known as the lease term and is scheduled out over a predetermined number of months. So, instead of financing 100% of the vehicle, you only finance the percentage of its useful life that you consume. If you plan to change vehicles before you would have paid it off in a normal financing scenario, leasing can save you money. The upside is that you only pay for what you use.
During the lease term two significant things happen: the vehicle depreciates while you consume pieces of its useful life. Depreciation in motor vehicles is notorious for how quickly it falls in the early months of ownership. Much has been said about how the value of a new vehicle falls when you first drive it home. You'll hear alarming numbers that are more hysteria than historical. While the amount differs from model to model, what is true is that the largest depreciation happens at the front end and tends to taper off the closer you get to the 5-year mark. We go into greater detail in our post, [SURFING THE DEPRECIATION WAVE]. For now, just note that the lion's share of the depreciation will happen while you are making your monthly payments. If you don't plan on keeping the vehicle for its entire life, you will have absorbed all the functional risk. Because of this, leasing can seem attractive. However, there are things to be aware of:
- Kilometre/Mileage restrictions: Useful life is measured by a number of factors. One of the biggest is how far the vehicle's been driven. Because of this, the original lease will be based on a benchmark distance, usually between 20-25,000kms. While this amount is usually negotiable on the front end (based on the lessee's anticipated use), exceeding the restriction will result in a per km charge. See our mIQ article, ["ARE YOU A HEAVY OR LIGHT USE DRIVER"].
- Excessive wear and tear liability: When you lease a vehicle, you are expected to return it unmarked and well-maintained. Scratches, dents and window chips will be charged back to you. So will non-functioning elements like wiper blades, brake shoes, and headlights, A/C and radios. This can quickly mount up as any trip to a body shop will tell you. While allowances are made for "normal" wear and tear, the boundaries between normal and excessive can be vague and discretionary.
- Leasing doesn't always equal lower payments: Yes, you may only be paying for the portion you use during the lease term, but two other factors will determine your actual monthly payment: interest rate and the actual length of the term. If both the prospective finance term and lease term are the same, and both are at the same interest rate, your lease payment will be lower. As we noted previously in ["Payment Calculation Article LINK"], what happens if your lease term is half as long and the interest rate is twice as much?
- The relative accuracy of the residual calculation: Despite reasonable forecasting efforts, determining the market value of the subject vehicle 24 or 48 months down the road is not an accurate science. One of two things will have happened by the end of the lease term; a buyout will either cost you more or less than the vehicle is actually worth For a more comprehensive picture, see our mIQ article, ["LINK"].
- Early termination penalties: Despite
So, even by restricting the analysis to just Price it’s easy to see there are many “best” times to buy. As we at mIQ say, buying right means you need to consider many other factors at once. Yes, Uncle Dave, it is true the commission incentive fuels all sales departments. But that’s true all year long. What’s of greater importance is that you buy when it makes sense to you. And when you do, make sure to use the full range of benefits available at that time.