Today more people than ever see leasing a car as their financing answer. In 2007, leasing was about 17 percent of all new car sales. The economic downturn in 2008 and 2009, however, nearly eliminated leasing from the financing landscape. Several lenders stopped writing leases entirely, and others severely reduced their leasing programs.
Today, according to credit-data expert Experian Automotive, leases have rebounded to top prerecession highs, accounting for almost 27 percent of all new-car purchases, and that includes those made with cash. If you remove cash sales from the math, leasing accounted for nearly one-third of all cars sold in the first three months of 2015. The average credit score for leases has been steadily decreasing for the past few years, too, dropping from 721 to 718 in the past year alone. That means leases are easier to get.
Once upon a time, only wealthy people or businesses leased cars. It is, after all, essentially renting a car rather than purchasing it. Whether renting or buying makes better financial sense for you depends on several factors. Topping the list are how long you intend to keep a car, as well as how many miles you think you will drive it each year.
What Is a Car Loan?
With a traditional car loan, you buy a car through a lender, such as a bank, credit union, or a carmaker’s lending company. The lender basically arrives at your monthly payment by subtracting any down payment from the purchase price, dividing the balance by the number of months you agree to pay, and then adding monthly interest to that amount. When you pay off the loan, you own the car. If you plan on driving a car until the wheels fall off or think you’ll drive more than 12,000 miles a year, traditional financing is the way to go.
What Is a Car Lease?
Because leasing is basically renting, calculating your monthly payment requires a completely different formula. After the transaction price, the car’s estimated residual value (what the car is projected to be worth at the end of the lease) is the most important number. What you pay for is the difference between the transaction price and estimated residual value. Your monthly payment will be that amount divided by the number of months in the lease plus interest. There are some tax advantages to leasing for the self-employed. Otherwise, leasing works for people who want a new car every 2 or 3 years and typically drive no more than 12,000 miles annually. Driving more than that will often lead to paying a per-mile penalty at the end of the lease.
Why You Might Consider Leasing
New-car prices are rising thanks to factors such as increased technology and fewer factory incentives. One big advantage to leasing a car is that it offers lower monthly payments than traditional car loans. For example, according to Experian, in the first quarter of 2015, the average monthly lease payment on a Toyota Camry was $312, compared to $428 for the average loan payment. That’s almost a $1,400 annual savings or nearly $4,200 over 36 months (the average term of a lease).
So far in 2015, nearly 7 out of 10 traditional new-car loans issued have been for more than 5 years (60 months). Nearly one-third have been for 6 years or more. In loans like this, you will have to keep a car for 4 years or more before it has any trade-in value. If you want to change cars every 2 or 3 years, leasing makes good sense.
What It Means to You
Leasing is a popular way to stay within your budget when buying a car. It’s not for everybody, but if you can stick to the lease’s terms, you can reduce your monthly payments.