The Expert Podcast

New car leasing used to be a very desirable method of selling a car by new car dealers and manufacturers. The reason why is because it promoted brand loyalty, so that at the end of a lease, it's very likely that the driver is going to bring that car back to the dealer where it was leased from, or at least the same type of dealer, and maybe look at another car. In addition, it's a very good way to put more discounts into a price without making it appear like it's bargain-basement. For example, if you're buying a brand new car and you saw on the window a two-thousand-dollar rebate, it might make you think that the car is not very desirable. But if you took that two thousand dollars and put it into the lease deal, it was a discount—you have a lower payment, but the buyer doesn't think it's like a blue-light special at Kmart.

So, why is leasing not as desirable today? Well, there are a couple of reasons. First of all, there aren’t as many discounts that dealers and manufacturers need to offer because there's a shortage of inventory. Second, resale values are questionable. One thing about a lease is that the lease payment has as much to do with the future value of the vehicle as it does with the selling price. The lease payment is based on the selling price minus what they estimate the value will be in three or four years (the length of the lease). You pay the difference. So, for example, if you have a forty-thousand-dollar car and in three years they think it will be worth twenty thousand, you’re really only paying for that twenty-thousand-dollar difference over those payments.

At the end of the lease, you have to turn the car back in, and that's where they get their twenty thousand back. But right now, there’s some question about what cars will be worth in three years, especially as electric vehicles are starting to come into the market. This uncertainty makes lease deals less appealing. However, the manufacturers and dealers prefer leasing because it's easier to sell a customer on payment versus price, and they can offer more discounts within the lease without making it seem like they’re giving away too much.

So, what should you do if you're a buyer? If you have a leased vehicle right now, you might want to consider buying it out at the end of the lease. Look at the residual value, or the purchase option price, compared to the market value—you might see that you have a great deal on the car. Even if you don’t want to keep that car, you might be able to trade it in and put that equity toward your next vehicle. If you're considering new vehicles, compare the lease payments with the finance payment. Remember that leases typically have a shorter term, usually three years.

Why is a three-year term an advantage? Well, it gives you an option to exit after three years. With a five-year loan—or, more extreme, a six- or seven-year loan—you may owe more than the vehicle is worth after three years, which can lead to negative equity. In three years, if you're tired of the car or want to trade it in, you might have to either pay the difference or roll it over to your next car. If you lease a vehicle, you don’t have that issue, as long as the vehicle is in good condition and you haven’t exceeded the mileage limit. You simply return it, drop the keys on the counter, and walk away.

A lot of people think leasing is just throwing money away since you’re "renting" it. But when you finance, you’re also renting until you get past three years. On a lease, you still have the option to buy the vehicle, and sometimes, if you add up all the lease payments plus the buyout option, it’s less than financing over five years because some incentives are built into the lease. Be a smart consumer—compare all options.

Don't go in blindly assuming one option is always better. The dealer may make one option look more attractive, and we've seen cases where leasing is actually cheaper than paying cash. It’s not common, but sometimes there’s an incentive built into the lease that’s not available for cash deals. Add up the lease payments, include the buyout option, and sometimes it’s the same as if you’d paid cash. Plus, if you lease and buy it out, you have cash in hand for that period.

Get competitive quotes on all three options: cash, lease, and finance. If the dealer isn’t willing to provide transparent quotes on all three, consider walking away. Leasing isn’t always the best deal, but don’t discard it without comparing. In some cases, leasing is attractive for certain vehicles.

One misconception about leasing is that you’re restricted on mileage, but you can drive as many miles as you want. However, if you turn in the car at the end of the lease, excess mileage will count against you. The same goes for financing or paying cash; high mileage will lower trade-in value. Ultimately, mileage costs you in different ways across all options.

So, consider all options carefully. Don’t assume one is always better. Make sure to pressure the dealer to provide good quotes so you can ensure you’re getting the best deal and picking the right method to buy the car.