Leasing a car is one of the methods of automobile financing, similar to renting in some respect, but not identical. Its benefits highly depend on lessee’s lifestyle.
Car Leasing Explained
The car is an asset, which is a subject to depreciation and obsolescence. In other words, its value decreases with time and mileage. That is why your new car (if it is not some sort of collectable) will cost significantly less after three years in use.
This principle is at the heart of leasing: in bare numbers, you pay the difference between the price of a new car, including the leasing company’s interest, which is called money factor, and the car’s future decreased price. In the end, you will not own the vehicle, but the price you paid for leasing will be comparable with the money loss after selling depreciated car.
2016 BMW 7 Series. If you like new luxury cars like this, you might think about leasing. © BMW AG
Is it Better to Lease a Car or Buy a Car?
The very existence of both possibilities assumes that there is no direct answer. It depends on your purposes and intentions.
Leasing a car is a reasonable option for those who like state-of-the-art cars and want to drive a fresher model every 2-3 years (or if you prefer to change cars often for some other reason). It is also very useful for temporary workers, travelers and those who are not going to live in the country more than few years. In most cases, you have the choice to buy a car at set agreement price at the end of lease term.
Leased cars usually have strict mileage limitations. If your mileage is highly unpredictable – you don’t mind to make spontaneous trips from New York to Los Angeles once in a while, for instance – then leasing is not for you. If you don’t want to be responsible for car’s condition and take good care of it, leasing is not for you also; you will be charged for every issue.
In general, short-term cost of leasing a car is significantly less than the cost of buying; medium-term cost is about the same; and the long-term is always more.
Example
Let’s compare 6% APR lease with 0% APR loan and 6% APR loan for three years and a car worth $23,000 (lease residual – $11,000).
Down payment will be the same – $1,000.
Monthly payment for 6% APR lease will be $388.06, for 0% APR loan – $611.11, for 6% APR loan – $669.28.
Conclusion
Leasing a car is a good option for some class of clients and absolutely not for others. If you need a car for long-term use, it is definitely not for you.