Leasing can be a smart alternative to financing for the right driver. Payments for leasing can be significantly lower than financing, but does subject the buyer to a yearly contract with mileage restrictions. The pros and cons can vary based on needs, driving habits, budget and need for flexibility. As there is a decent amount of flexibility involved with leasing, the fees for going over mileage agreements, an inability to carry out the term of the contract or unpredictable driving needs that can change over the term of the contract can be significant. When deciding if a lease is right for you, consider the following information.
A vehicle can be leased for a variety of terms.
Whether it is a period of as low as 12 months or as great as 60 months, a customer pays the monthly payment for a predetermined amount of time. This is a great benefit for people who like to trade out of their vehicle often. Some people enjoy driving a new car every two to three years, and leasing allows this to happen without the hassle of trade-ins and future market value, which is unpredictable.
Because leasing terms are for a predetermined amount of time, if there is a need to exchange or get out of the leased vehicle, this can be hard to do. Early lease turn in penalty fees are incurred which the customer is responsible for paying, as well as any payments due for the rest of the term. Although not impossible, ending a lease early can be costly.
Payments for leasing are generally a desirable amount lower than traditional financing.
Customers are paying for a portion of the vehicle while they are driving it, similar to renting the vehicle, but from the bank who is leasing it out. The leasing institution assumes the residual of the vehicle, which is a predetermined amount of the vehicles worth after the term is over. This is beneficial for the customer because they do not have to worry about what their vehicle might be worth in several years after driving it. There is no need to make extra payments to improve equity in the vehicle, or worry about trade in values or economy fluctuations at the dealership at a later date.
Mileage restrictions are another important consideration for leasing as the residual amount is based on the mileage at the expected end of the term. The leasing customer will be responsible for staying under a preset mileage cap. Leasing mileage can be set as low as 10,000 miles per year up to as high as 20,000 miles per year. Of course, the higher the mileage chosen, the higher the monthly payment will be. Some leasing companies offer extra mileage to be purchased, while some don’t. Leasing is obviously not ideal for high mileage commuters, but 15,000 miles a year is plenty allowance for most.
The penalty for going over mileage is determined at the beginning of the lease. A standard fee is at or around $0.15 a mile over the predetermined amount. However; many leasing companies do offer what is called a “pull a head program” which is an incentive to turn in and completely end a lease up to six months early to finance or lease another vehicle. This is great for those who worry about going over their mileage but want a new car and offers those who are ready to get out of their lease a great incentive to do so.
Leasing can be very flexible as the vehicle is available for purchase after the term is up.
This is can very beneficial for a variety of customers. There are buyers who chose to lease and never intend to stay under the mileage restriction. They do this because they want the lower payment for the specified time, which does run at a rate much lower than traditional financing. The residual value, being predetermined at the beginning of the lease, can be easily financed at the end of the term. For people who go over their mileage because of unexpected events during the term of their lease, the buy out at the end deters over mileage fees and they can own their vehicle instead. If the leasing customer falls madly in love with their vehicle, they do not have to give it up at the end.
Leasing is available to high credit customers only. This should be considered and it is not advised to rely solely on pull ahead programs or buying out the vehicle in the end if the mileage becomes higher than it should have been. Although it is a great option, life is unpredictable. If the consumer’s credit is damaged, regardless of payment history with the leasing institution, a future lease may not be obtainable. Financing may be hard to obtain, as well.
