Here’s the latest reader question, along with my reply:
My mother in law recruited me as the man to help her find a new car. One salesman claims that there is no downside to leasing anymore and that the old “if you want to keep the car more than 5 years, buy/if you want a new car every 2-3 years, lease” conventional wisdom is no longer valid.
Supposedly there is a set in stone minimum value to the car at the date the lease ends as long as you don’t go over mileage and if the market for that car is strong, the value could be greater. Anyways, the guy was a little too slick for me which makes me think there’s something I’m missing. He wasn’t really pushing us to lease, however.
There are several downsides to leasing – including the obvious fact that you are merely renting the car and will therefore never have equity in the car. Instead, you will make payments in perpetuity. There may be some tax advantages to this, if you can deduct the cost of the lease as a business expense. If not, you are simply renting the car – and the money spent on rent is gone as soon as you send it in.
Also, there are always mileage limitations, which if exceeded result in heavy penalties. And you will be penalized for dings, dents, fabric stains and so on at the end of the lease.
The residual value is the estimated value of the car at the end of the lease; it is a critical factor in setting monthly lease payments and is based upon expected depreciation. If the car is anticipated to depreciate rapidly, the lease payment will usually be higher. If the car is expected to hold its value better, the lease payment is usually less. But the relevant point as regards your question is that monthly lease payments based on residual value are not adjustable. You sign the contract going in – and it is what it is. Including – usually – the expected residual value, which is the amount you’d have to pay at the end of the lease if you decided you wanted to buy the car.
Leasing is not necessarily a bad choice; your monthly payment will generally be less and you get to drive a new car continuously and will never have to worry about major repair expenses as these are not likely to happen with a new car and even if they do, will usually be covered by the new car warranty/lease contract.
But for the salesman to tell you there is no downside to leasing is disingenuous at best.
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