There are several factors to consider before deciding whether to buy or lease a vehicle. Driving habits, clothing purchases, manufacturer incentives, and vehicle fees and depreciation are the main factors, but there are others as well.
— Driving clothes —
This is the easiest qualifier. All auto finance companies, whether it’s the manufacturer’s division like Ford Motor Credit, a specialized lender like Wells Fargo, or a bank or personal loan, have various lease and purchase programs available.
Determine your mileage habits, taking into account travel plans, possible job or home changes, and anything else that might cause you to drive more or less than normal. Once you have an idea of how many miles you’re likely to drive over the length of the lease, find out if there are plans to match.
If there’s a good chance you’ll go overboard, leasing isn’t the best option. If you are not going to review, continue with the next factor. Driving 10k miles per year does not automatically make leasing the best option.
— Buying clothes —
More than 65% of Americans between the ages of 25 and 45 change vehicles every 2 to 4 years. Finance companies know this, which is why most offer lease terms that fall within this range. Some last longer.
Leasing is freedom and prison at the same time. While it gives the consumer the opportunity to get out of a low-mileage vehicle and into a no-mileage vehicle, it also binds the person to the terms. Once you’re in, it’s difficult and/or expensive to get out. Trading is difficult until a few months before the deadline.
If you’re sure you want to change vehicles every 2-3 years (and have leasing “driving habits”), then leasing is potentially the best option. If you keep your cars for four years or more, that doesn’t necessarily mean you shouldn’t lease them.
When GM started its SmartBuy program, consumer advocacy groups were very upset because it was a lease that looked like a purchase. Terms like “balloon payment” and “due at end of lease” became synonymous with “SCAM”.
In reality, this is a method of “buying” more vehicles than a person’s pay range would normally dictate. As an example, a recent Lincoln promotion offered its luxury MKZ for $0 down, $0 at signing, $0 down and $399 in monthly payments on a 39-month lease.
A standard 72-month loan at a low 2.9% on a $35,000 vehicle would be more than $500 per month. If a consumer wanted to buy this MKZ in Tulsa Lincoln and had excellent credit but didn’t like the high payments, they could lease it for 39 months. After the lease, they could finance the balance and still be less than $400 per month.
This is NOT the recommended way, but for those with “a taste for steak on a burger budget” it is an option.
— Manufacturer Incentives —
The vast majority of auto lenders like to keep a mix of leases and purchases on the road. Too many leases cause the manufacturer to lose more money when vehicles are delivered because residual values are typically higher than actual cash values. In other words, what the manufacturer thought a vehicle should be worth in 3 years (residual value) is typically higher than what they actually bring in at program car auctions (actual cash value).
Still, they want a certain number of leased cars on the road for a number of reasons. In the long run, leases make more money for manufacturers and their dealers due to increased owner loyalty, a greater chance of proper vehicle maintenance, and a better opportunity to sell more expensive vehicles at higher profits.
All of this translates into a nice ebb and flow of incentives offered. There will typically be incentives for both financing and leasing a vehicle, but whichever way the finance companies want consumers to lean during that particular time period is the option that will have the best incentive. Look at both options and see which one feels better.
— Vehicle and Residual Rates —
Some vehicles are good for lease. Others are not. The two most important factors (and often the most difficult to understand) are rates and residuals.
The lower the rate, the less the owner will end up paying. It sounds simple, but when comparing different makes and models, a lower rate can also mean a lower residual. If this is the case, any savings a consumer gets from the rate is eliminated by the lower residual.
Residual value in a leasing equation is the amount the finance company believes the vehicle will be worth at the end of the lease if it is within the mileage limit, mechanically cared for and undamaged. The higher the residual, the lower the amount financed and therefore the lower the payments.
For example, if a $30,000 vehicle has a 50% residual for three years, the buyer essentially gets a $15,000/36 month loan. If the residual on that vehicle were 40%, the buyer would pay 60% over that time, thus getting a $18,000/36 month loan.
Sometimes it’s hard to follow the math, but the concept is simple. The higher the residual value, the less the buyer will pay during the lease. Consumers who are true “lessors” who will switch vehicles at the end of the term should look for higher residuals. People who are renting for low payments and plan to take out a loan for the balance at the end of the lease shouldn’t worry too much about residuals, whether they pay 60% now, 40% later, or 50/50 % now/later, they are still paying 100% for the car in the long run.
Vehicles for 2007 that had the best residuals in their class include:
Volkswagen Rabbit, Toyota Camry, Toyota Avalon, Pontiac Solstice, Lexus IS 250/350, BMW 6 Series, Honda Odyssey, Land Rover Range Rover Sport, Jeep Wrangler, Toyota 4Runner, Mercedes GL-Class, Toyota Tacoma, GMC Sierra/Chevrolet Silverado
Imports generally have higher residues than their domestic counterparts. Automotive Lease Guide lists the following as the best manufacturers for leasing:
— Final Thoughts —
One last plea: buy used. There are great sites where consumers can buy a car online, such as Baltimore Used Cars, where a consumer can buy thousands of cars that match their criteria. Still, if a customer wants something new, he must buy something new.
Leasing and buying each have distinct advantages over the other. The best thing a consumer can do to decide is to look at the whole circumstance, investigate the possibilities, apply the above ideas to the equation, and then choose what is best for their situation. Knowledge is a buyer’s (or renter’s) best friend.
I hope that helps.