What leasing means and when it could be the right choice
Congratulations, you’re ready to get a new vehicle! But, is it time to lease or buy outright? It’s important to review your financial history and upcoming goals to determine the best option for you. Let’s look at some pros and cons of leasing.
What is leasing?
Similar to renting an apartment, you’re “renting” a vehicle for a fixed number of miles and time. Rather than purchasing a new or used car outright, you’re paying to borrow and drive a newer model from a dealership. At the end of a typical three- or four-year term, you’ll return the car to the dealership. From there, you can choose to buy out the lease (if permitted), lease a different car, or switch to a purchase.
Monthly lease payments are determined by the vehicle’s expected depreciation plus interest. Depreciation is calculated by subtracting the vehicle’s estimated residual value (or what it’s estimated to be worth when your lease expires) from its current value.
Depreciation = Current Value - Estimated Residual Value
For example, if the vehicle’s purchase price is $25,000 and in 3 years, it’s expected to be worth $15,000, your lease principal will be $10,000. As with other loans, a higher credit score usually results in a lower interest rate. So, when does it make sense to lease?
Pros vs. Cons
Pros:
- Leasing often comes with lower monthly payments because you are not taking out a loan for the full value of the car.
- A short-term commitment gives you time to decide if you’d like to continue leasing or save up to purchase.
- Typically, you’re renting newer models and switching vehicles more frequently, which can cut down on maintenance or repair costs.
Cons:
- Because you’re only paying for the car’s depreciation, you’ll have no equity or ownership claims at the end of term.
- If you exceed the mileage limit, you’ll pay extra per-mile fees.
- It’s more difficult to get approved to lease with a low credit score, and you could face higher upfront financing charges.
Leasing is a great short-term option if you’re looking for newer vehicle features and a lower monthly payment, but it’s crucial to consider your budget and driving habits before signing the dotted line. Still not sure if leasing or buying makes sense for you? Reach out to our friendly consumer lending team to discuss your options!
