To Lease Or Not To Lease
You've probably seen it, remember that time you were watching your favorite show on TV and then this beautiful car comes out of nowhere? With a sleek style and powerful engine, drifting into the night in the city, the sound of the engine makes your heart race, you see yourself driving that car, you wan it! You think you can't afford that advance piece of machine and reach for the remote to change the channel. As you are about to press the button, there it is, $399 a month for 36 months and you can drive it, WHAT!!?
How is that possible? How does it work? What is leasing? Don't worry my friend! Here I come to save the DAY! (in super hero voice).
Leasing is just another way to buy a car but with flexible options at the end of the contract. How it works is simple. You will own the car for the time and miles that you want to use (i.e. 36 months/36,000 miles) and at the end you will have 3 options:
Option #1. You can return the keys to the dealer and lease another a newer model.
Options #2. You can trade in the car and use any equity to your advantage.
Option #3. You can buy it.
What's the Benefit?
Leasing is a great option for people who don't use a lot of miles and like to change cars every 2-3 years. You can drive a new car more often for the best portion of its life because is under the factory warranty usually for a lower monthly payment.
What's the catch?
When you lease you are committing to keep the car for x amount of time and miles. There are penalties if you want to cancel the contract early or if you go over the miles. That's why is very important to tailor the lease to your driving needs so you don't get hit at the end of the contract for over mileage which in some cases is .20 cents per mile.
How to calculate a lease?
The most important thing in leasing is the Residual value of the vehicle. This is what's the vehicle's worth after x amount of time and miles. The higher the Residual value the lower the payment. So let's say you want to lease a vehicle that has a 50% Residual value after 36 months, this means the vehicle depreciated 50% of its value in 3 years. So what you do is you divide the depreciated 50% value in 36 months and that will be your base payment. This payment does not include interest, taxes, fees or down payment. It will look something like this:
20,000 x 50% = 10,000 | 10,000 / 36 months = 277.77
So now let's say the Residual value is 65% after 36 months which means the vehicle depreciated 35% in 3 years. It will look something like this:
20,000 x 35% = 7,000 | 7,000 / 36 months = 194.44
In a nutshell, you are paying for the total depreciation that the vehicle will have on the time that it will be in your possession, makes sense? Some vehicles have better Residual value than others. If you use a lot miles you can still lease a vehicle but the Residual value might be lower at the end and your payment might be higher.