Sunday, October 16, 2011

Leasing Basics

Car Leasing Basics

Once you decide on a vehicle you will need to figure out if you want to buy or lease the vehicle.  Traditionalists will always go with the buy but leasing has maintained popular over the past 15 years or so.  If you are someone who likes to have a new vehicle every 3 to 4 years, doesn’t drive over 24,000 km and year and maintains your vehicle well then leasing may be for you.  If you are someone who keeps vehicles a long time or puts on a ton of km’s per year then leasing is not for you. 

When you lease a vehicle you pay for the portion of the vehicle you use.  There are three basic components to the payment you will make:

Vehicle Price
Interest Rate
Residual Value (Value of vehicle at the end of the lease)

What you pay for is the difference between the vehicle price and residual value taking into account any interest charges.  Of course vehicles depreciate more quickly in their first few years than in later years.  With a four year lease, the residual is normally between 35% to 50% of its original price with vehicles I have compared, meaning your vehicle is predicted to lose anywhere from 50% to 65% of its value after four years.  I have found Honda, Toyota and Volkswagen (especially diesel models) to be near the 50% mark in residual with Ford’s being on the lower end closer to 40% and Hyundai way down around 35%.  As a result Honda’s and VW are often good lease deals as long as the interest rates are reasonable, Hyundai not so much.  I also found Hyundai and Kia (really the same company) to be actively promoting against leasing in the dealership; they also currently have 3.49% lease rates compared to 0% purchase rates on most of their vehicles. 

If you think leasing may be for you make sure you get details on residual value (you want this to be as high as possible, for a four year lease you are aiming for 50% of purchase price) and interest rate being charged, if they seem reasonable then leasing may be the way to go.  One thing you will find is that as a model year ages the lease rate will normally drop BUT the residual will also drop because the vehicle is aging and may not be worth as much in 4 years as it would have been 8 months ago.  So while it may seem like the lease deal is getting better it may not be or at least not by as much as it seems.

The problem I ran into with my last lease was excess wear and tear charges (see End of Lease Time on my Pilot post).  I will be posting a video of my Pilot in the near future and show you what they were trying to charge me for.  With my previous three leases I was not charged any excess wear and tear.  So my only advice may be not to lease a Honda because they try to screw you in the end, although the actual lease deals from them up front are pretty good.  I think things are after being tightened up a bit on the lease end process in recent years.  If anyone has had end of lease wear and tear charge stories please let me know about them.

About three years ago when car companies started having financial difficulties they increased lease rates to sway the customer away from leasing and into purchasing.  One of the results of this is a current lack of good 3 to 4 year old off lease used cars right now.  A good deal on a used car is not as easy to find as it once was.  Lease rates are very competitive right now, still slightly higher than purchase rates in most cases but not by much.

So to summarize, if you want to drive a new car every few years, don’t drive too much and look after your vehicle then leasing may be for you.  If you do not fit this profile then leasing is not for you.  If you have any questions please let me know.

Note:  I am not going to get into leasing for business purposes here, this post is intended for regular people like you and me. 

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