How A Car Lease Works
Why Should you consider leasing in 2024?
If you have been shopping for a car lately, you may be shocked at how high the prices are, even for an average set of wheels. Welcome to the new reality, where the transaction price of the average new car is closing in on $50,000. You may be wondering how you can possibly afford a new vehicle, due to the ridiculously high monthly payments needed to purchase it.
Don’t despair…Auto Ninjas has a solution for you! Getting yourself behind the wheel of a new car is not only doable, it is much more affordable than you might think. We invite you to enter the world of leasing your next new car, where you can get a lot more car for a lot less money!
What is leasing?
Leasing is a way for you to drive a vehicle without actually owning it. Leasing helps you to avoid many of the negative aspects of buying a vehicle.
Leasing is a lot like renting
Leasing a vehicle is generally similar to renting one, except that a lease usually lasts for a few years, a much longer term than a typical vacation or business car rental. What they both have in common is that you are paying for the use of the vehicle, and not for the vehicle itself.
This means that you are only responsible for the part of the vehicle that you use, which also includes depreciation over the term of the lease. The leasing company owns the vehicle for the entire duration of the lease, just as the rental company owns your rental car.
While the vast majority of leasing customers turn in their car at the end of the lease and start a new lease with a new car, not everyone follows this pattern. Every lease customer has the option to purchase their vehicle at the end of the lease, by paying the leasing company the agreed-upon residual value.
How much will your lease payment be?
Your lease payment will be based on what your leased vehicle will be worth at the end of the lease. The factors that go into this calculation are the cost of the vehicle, how many miles you plan to drive it, the money factor (which is somewhat like an interest rate), and its typical residual value at that point.
Put it all together, back out the residual, and divide by the number of months – there is your monthly lease payment! The great news is that your lease payment will be significantly lower than the monthly payment for financing the entire value of the vehicle over the same term.
To help you with these calculations, Auto Ninjas offers you an easy-to-use automated lease calculator for each individual vehicle featured on our site. Simply enter your desired down payment, lease term, and the number of miles you plan to drive each year, and the ALN site does the rest!
What are the benefits of leasing?
There are many benefits to leasing. Some of these are economic, while others are more personal. Let’s take a closer look at why leasing makes sense in today’s high-priced automotive world:
Leasing a car lowers your monthly payment: Because you are only paying for the portion of the vehicle that you use, and not the entire thing, the monthly payment is much lower. By lowering your monthly cost of transportation, you have more left over for saving, investing, or entertainment. Think of what you could do with the extra money! Plus in most states, you only pay sales tax on the lease payments, and not on the entire cost of the car, which is what always happens when you purchase.
You could lease a nicer car than you might be able to purchase: This is the flip side of the “lower monthly payment” argument. You may be able to lease something more upscale, higher performing, or with more options than you would otherwise be able to purchase. If you plan to go this route, be sure to check out the related additional costs that can come with more expensive vehicles, such as higher insurance premiums.
You can tailor a lease to your exact usage patterns: The beauty of a lease is that you can set it up with the exact number of miles you need to drive. It might cost you a bit more per month if you drive more miles than average, but you can take comfort in the fact that these additional miles cost less when you build them in up front, compared to what you would have to pay at turn-in time when you exceed your limit.
You will always drive a car that’s under warranty: Every vehicle in today’s market has at least a three-year warranty, so the typical three-year lease term keeps your car under warranty from beginning to end. This means no expensive surprises if there are any mechanical failures during your lease. It’s covered!
You can get into a lease by putting little or nothing down: Many lease deals offer you the option of putting down a small down payment, or even none at all. This is the way to go. There is really no benefit to putting money down on a leased car if you don’t have to. Your lease will have a fixed cost, so why not hold onto your cash as long as possible?
You get all the newest fuel efficiency, driver assistance, and connectivity technology in your car: The state of the art is advancing very rapidly in the automotive world. Each year, more and more technology is being built into new vehicles. When you lease, you can have all the latest and greatest tech features that are available at that time. And when your lease is over and you start a new one, the next generation of technology will be waiting there for you!
Every few years, you can lease a new vehicle that suits your current needs: Lifestyles change and leasing gives you the flexibility to change up your vehicle as your needs change. You may start out as a single with a sports car or a coupe. Perhaps you get married and need something larger, like a sedan or a small SUV. There may even be children down the road, requiring a bigger SUV that can hold the car seats and all the other stuff you have to take along. Leasing lets you pick the right vehicle for your situation.
You can deduct more if you use a leased car for business: The tax laws tend to favor a leased car used for business over a purchased car, allowing you more generous deductions. Consult your tax advisor or check the relevant IRS publications for all the details that apply to your specific situation.
You won’t find yourself “underwater” with a long-term car loan: Because cars, trucks, and SUVs are getting so expensive, buyers are going for longer loan terms to make things more affordable, as long as 84 months and sometimes even longer. That’s seven years of payments on the same car!
The big problem comes when you want to trade your car in after a few years – it is now worth much less than what you owe on it! This is known as negative equity or being “underwater.” It is a deep, dark hole of extra debt that costs you even more to get out of. It should be avoided at all costs.
When you lease, there is no negative equity. At the end of the lease term, you simply turn in the vehicle, walk away, and start fresh – with a brand new lease on a brand new car that has a brand new warranty! That’s much better than having four years of payments left on a car that’s out of warranty!
Leasing is a great solution!
Whether you want to pay less, avoid repair costs, drive something nicer, protect yourself financially, conserve your cash, have the latest technology, or come out better at tax time, leasing is the answer to many different automotive questions.
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