When Does a New Car Lease Make Sense

Let's face it, you love cars. You love to drive a new or late model car, the smell of a new car, the feeling of new and untapped power under the hood. It is exciting. But one of the problems is that your financial resources are a bit more limited than your dreams are, so you may want to consider a car lease instead of going out to get a car loan for a purchase.

The first thing you need to understand is exactly what is a car lease. When you lease a car, it does not mean that you own the car. Rather, it is more like renting the car, although there are still many very important differences. For example, you still need to pay for the insurance on the car. This is critical because you need to carry full coverage on the car, including collision insurance, which serves to protect the risk of the owner of the car while you have it out on lease. This insurance is typically more than what you might normally have if you had purchased the car outright, so be sure to figure the cost of insurance into your overall cost of driving the car.

One of the big bright spots with a car lease is that you do not worry about depreciation of the car, since you paid for that up front. You see, the cost of the lease is figured based on how much the car will be worth in resale value at the end of the lease. For example, if the car you want to lease cost $40,000 and at the end of a two year lease, assuming you have put about 24,000 miles on the car, the resale value is about $25,000 then the lease payment is figured based on the difference, or $15,000. This is exactly the reason that you can get a much better lease deal on a car that has a great resale value, instead of a car that it pretty much shot after two years.

Another reason that a leased car can be considered a better deal is because the payments are typically lower than if you had purchased the car. Again, as described above, this depends on the estimated resale value of the car after the lease period, but generally speaking, your payments will be less. However, since you are driving more of the car as an asset or resource with less of your commitment to the vehicle, your credit needs to typically be a bit better than it would for a purchase or a car loan.

The real beauty of a car lease is that at the end of the lease, you can just turn in the car and slide into a new lease on a brand new car. This is assuming of course that you have not put too many miles on your leased car. You should have a good feeling for how many miles you will drive. Standard lease agreements state about 12,000 miles per year although that can be adjusted up front if you know you will drive more. Be very conscious of how many miles you are putting on the car, since all miles in excess of what you agreed to when you turn in the car are assessed a pretty hefty charge, like 30 cents per mile or even more.

On the downside of a car lease program, you never own the car. You have replaced tires, wiper blades, paid insurance on it, but since you are leasing the car, you will never own it and will therefore always have a monthly payment. Contrast that with a car purchase, where after the car loan term, you own the car and can still drive it but you are not making car payments anymore.

Consider which option is right for you. A car lease can be a great deal and keep more money in your pocket, as long as you can live with the restrictions and limitations.