Does it ever make good financial sense to lease a new car instead of buying?
At first glance, it doesn't make much sense for many people -- at least, not in strict financial terms. When you lease, you're essentially renting the car, making payments without building any equity. And leasing is like renting a car in another potentially expensive way: Any visible wear and tear on the car will cost you dearly when you turn it in.
But for some folks, leasing a new vehicle does make sense -- even financial sense, in some cases. Here are some things to keep in mind if you're thinking about leasing your next new ride.
Lease prices are directly related to used-car prices
Are you someone who really craves having the latest and greatest? Are you a real estate agent or other professional who regularly chauffeurs clients and needs to make a good impression? Do you really like driving luxury cars -- but can't afford a four-figure monthly payment?
If it makes sense (financial or otherwise) for you to be getting a new car every two or three years, then leasing might be a cost-effective way to go. Buying a nearly new used car and driving it until it's old and tired is the best way to go for most, financially speaking -- but some people need (or at least really, really want) to be driving a new car every couple of years. And some people just want to be driving a nicer car than they could comfortably afford to buy.
So, how do we find a good new-car lease deal?
Leases can be offered by the automakers themselves or by third-party companies. But either way, the prices of new-car leases are driven by a couple of big factors.
One is interest rates, which have been low for a while. The other is what we call residual value -- the estimated value that the car in question will have on the used-car market at the end of the leasing period. The higher the residual value as a percentage of the car's sticker price, the cheaper the lease can be.
To some extent, residual values are driven by a new car's perceived quality. As companies like Ford (NYSE:F) and General Motors (NYSE:GM) have sharply improved their quality over the last several years, they've seen their cars' residual values rise -- and they've been able to offer more competitive lease deals.
Factors to consider before signing a lease
But all that said, nearly all automakers offer special lease deals on some models from time to time. Sites like Edmunds.com can help you track down the latest and greatest lease offers. But if you know the type of car you want to buy, check out the manufacturer's website -- nearly all list their current deals and offers, including lease offers.
But hold on -- before you run off to the dealership, here are some things to keep in mind.
- Pay careful attention to those mileage limits. Nearly all leases limit the number of miles you'll be able to put on your new car or truck in a year. Typically, those limits are in the 12,000 to 15,000 mile range, but they're usually negotiable. You'll pay more for a lease with higher limits, of course, because more mileage will lower the car's residual value when you turn it in. But it's almost certainly cheaper than the penalty (think $0.25 a mile, sometimes more) that you'll pay if you exceed a too-low limit. Take a realistic look at how many miles you've driven in each of the past few years before you sign, and leave a margin of error just in case.
- Will you be willing and able to keep the car for the full term of the lease? Are you sure you'll be able to make the payments for the full term? Will you get tired of the car before the lease is up? Most leasing contracts allow for early termination -- but at a hefty price, often almost as much as you'd pay to just stick it out. But if you really do get stuck, a few companies (like LeaseTrader.com) have created marketplaces for lease contracts that allow you to transfer the remainder of your lease to someone else for a fee.
- Do you need to modify your new car? Trailer hitch? Custom stereo? A giant supercharger? If you're leasing, beware -- most leases forbid "permanent" modifications, which include a lot of trailer-hitch installations. You could be charged for them as "wear and tear" when the lease is up. Find out before before you sign if your plans will get you into trouble.
- Are you hard on your cars? Some people just seem to accumulate a lot of dings and scratches on their cars over time. If you own the car, those dings are no big deal -- but with a leased car, you'll get charged for more than minimal "wear and tear" when you turn it in. Those charges can end up being a big unpleasant surprise. If you're hard on your cars, consider buying instead.
The upshot: Leasing can make sense for some, but be careful
Long story short, while it isn't necessarily the cheapest way to go, leasing can make sense for many people. But before you go shop for a lease deal, take a realistic look at how many miles you drive every year and at whether you'll be able to keep your leased ride in nice shape over the term of the lease.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.