After a house and college, a car is the largest purchase most families make. One of the decisions car buyers often consider is buying versus leasing. Car leases have lower monthly payments than car loans and are the primary way that luxury cars are financed. Their two major disadvantages are that lessees don’t get to keep their car at the end of the lease term and lease contract limits on the number of miles (e.g., 12,000 to 15,000) that can be driven annually without penalties.
Leases generally make the most sense for drivers who buy cars every 2 to 3 years (or always have car payments), drive fewer miles than the annual limit, and take good care of cars to avoid “excess wear and tear” charges. They do not make sense for drivers who want to economize and keep cars 7 to 10 years or more. Over time, the cost of leasing multiple cars will likely exceed the cost to buy one new one. Below are four tips to lease a car for less:
Negotiate a Better Lease Deal– Request better terms than those that are advertised. For example, request a higher annual mileage limit if you have a long commute and a lower capitalized cost (similar to the purchase price of a car).
Follow “The Rule of Three”– Compare the residual value (estimated value of a car at the end of a lease), capitalized cost, fees (e.g., excess mileage) and money factor (similar to interest on car loans) for at least 3 different car dealers.
Purchase Gap Insurance– Cover the risk of having a car totaled in an accident or stolen and receiving less money from an insurance company (based on the car’s depreciated market value) than the cost of remaining lease payments.
Avoid Car Lease Penalties– Plan your lifestyle and driving habits (e.g., job tenure, length of commute, telecommuting frequency, and car care) to avoid fees charged for excessive mileage, excessive wear and tear, and early termination.