How to Lease a Car the Easy Way
It’s an age-old question when it comes to getting a new car: lease or buy? There’s no one definitive answer. It comes down to your own personal decision, which depends on your own situation and preferences. But we will help you grasp the differences between the two so that you can make an informed decision.
We’ll discuss the differences between leasing and buying, the pros and cons of leasing a vehicle, and the effect of leasing on your credit score. We’ll also give you a few pointers about negotiating the terms of your lease.
Leasing versus Buying
Whether you buy a car using a car loan or you lease a car, you must make monthly payments. If you buy, the payments continue until you have paid off the full purchase price of the car and the interest charged for the loan, at which point the car is yours free and clear. If you lease, you rent the car for a set period of time, at which point you can either return it to the lessor or buy it at its now-depreciated value.
To lease a vehicle is to pay only for the amount of your use of it, as measured by the duration of the lease. During the lease, you make monthly payments that typically continue for 24 to 48 months, and the number of miles you may drive is contractually limited.
If you do decide to buy the vehicle when the leasing period ends instead of returning it to the dealership, you must pay its residual value. This is the price that the vehicle manufacturer is willing to pay to buy the car back from the dealer. So make sure that the dealership is using the right price from the manufacturer before signing any papers.
More often than not, though, people who lease cars return them to the dealer when the lease expires, then lease another vehicle until the lease on that one expires, and so on, going through the same process over and over. This is just one great benefit of leasing: it always keeps you driving a brand-new and peak-reliable vehicle.
Leasing a Car Affects Your Credit Score
Just as buying a car with an auto loan affects your credit score, so leasing a car affects your credit score.
Because leasing a car requires you to make consistent monthly payments, doing so can help you build or rebuild your credit. With respect to your credit report, making lease payments are just like making monthly payments on any other type of loan. A history of reliable payments will build your credit over time.
On the other hand, missing payments or defaulting on the lease entirely will damage your credit rating. You can also damage it by paying the lease off early, which is regarded as comparable to the closing of a credit account and will likely subject you to additional fees. Finally, applying for a lease will result in a credit inquiry, which always lowers your credit score if only slightly and temporarily.
Whatever you do with the lease, it will be reflected in your credit score. So if you’re concerned about your credit history, make sure you fully understand and abide by the terms of the lease and consistently make your monthly payments.
What Are the Benefits of Leasing a Vehicle?
There are many reasons why you may want to lease your next car instead of buying it.
- Monthly payments on a lease are typically lower than the monthly payments on a car loan used to purchase the same vehicle. When buying, you are paying back principal and interest. When leasing, you’re paying a lower amount in order to borrow rather than buy the vehicle.
- When the lease is up, you can either buy the car or just walk away. You don’t need to worry about resale value or go through a selling process.
- You are driving a vehicle during the very earliest years of its life, during which it should be maintenance-free or almost maintenance-free.
- You can usually afford to lease a more expensive and better-equipped car than you can buy.
- The car is usually still under warranty during the term a lease, so major repairs are covered. Under the terms of most leases, the dealer also covers maintenance costs like oil changes.
- A lease typically requires a much smaller down payment than would be required for a purchase of the same vehicle.
If you enjoy leasing and do it over and over, you will be upgrading to a newer car every 24 to 48 months.
- If you’re using the leased vehicle substantially for business purposes or only for business purposes , you may enjoy significant tax advantages. The CRA currently allows you to write off up to $9,600 in deductions depending on your lease payments and harmonized sales tax.
- Making consistent monthly payments on your lease is like making monthly payments on any other type of debt in that it can help build (or rebuild) your credit.
What Are the Disadvantages of Leasing a Vehicle?
For some, leasing a car is the best decision; but not for everyone. Let’s look at the downsides of leasing a vehicle in Canada.
- Leasing one car after another leads to monthly payments that never end, unless and until you do buy a vehicle instead.
- The lease terms stipulate how many miles you may drive the vehicle during the leasing period. If you exceed the limit, you must pay extra, typically between $0.10 and $0.50 per mile.
- If you don’t maintain the vehicle well and return it in poor condition, the dealer can charge you for excess wear and tear.
- Since you are only borrowing the vehicle, you are not entitled to customize it or modify it in any way throughout the term of the lease. If you do, you must pay fees and penalties when the lease ends.
- Although you make payments on the car when you lease, you don’t actually own anything when the lease expires. In total, it’s usually more expensive to lease a car than to buy the same car and hold onto it.
- Applying for a lease triggers a hard credit inquiry, which will temporarily lower your credit score. If you miss a payment or decide that you need to get out of the lease early, your credit score will suffer even more.
What Credit Score Do You Need to Lease a Car?
Leasing a car affects your credit score. But it doesn’t only affect your credit score, it also depends on your credit score. At least to a degree. It’s easier and less stressful to secure a lease if you have a good credit score. You’ll also save a lot of money on the deal. But how high does your score need to be?
The general consensus in the automotive industry is that your FICO credit score should be at least 700 before you try to lease a car. If it’s significantly higher than 700, great. You’ll get the best terms and have access to more vehicles. Some dealerships will lease certain vehicles only to lessees with credit scores above a certain threshold.
If you have a credit score lower than 700, you will likely have to accept higher monthly fees and a more limited selection of cars. Depending on how bad your credit is, you may be eligible to lease only used vehicles. Leasing used vehicles can lead to other problems, such as having to pay for your own repairs and getting your finances even more tangled.
If you have bad credit but still want to lease a car, we recommend that you take the time to address your credit problems first. Work to bring up your score before leasing a vehicle. Deferring a monthly lease payment can help you pay down your existing debt faster and rebuild your credit. Once you’ve done that and improved your credit score, you will have better options. When you then make payments on a lease, your credit score will be further enhanced.
How to Negotiate Better Lease Terms
Most people make an effort to negotiate when buying a vehicle. They know that the dealer always has some wiggle room when making a sale. The same is true for leasing. But many people don’t know how to negotiate better terms with the leasing company. Here are a few tips.
- Research market values before visiting dealerships. Have an idea of what the vehicles actually cost before negotiating. Shop at many dealerships or through many leasing companies so that you can get the best possible deal.
- Make sure that the capitalized cost is fair. The capitalized cost is the total cost of the vehicle plus any other fees added to the price (like the deposit and the acquisition fee). The lower this number is, the lower your payments will be.
- Try to get a lower money factor. Also known as the “rent charge”, the money factor is similar to the interest rate on a vehicle loan. The lower the money factor, the lower your payments will be.
Change the number of miles you can drive. You can negotiate the mileage limit up or down, depending on your needs. Try to get more allowed miles without an increase in your monthly payments. Or accept fewer allowed miles in exchange for a discount.
Frequently Asked Questions
Who pays for repairs of a leased car?
More often than not, the car that you are leasing, being a newer vehicle, is still covered by the manufacturer’s warranty. The warranty will cover most major repairs. Regular maintenance is also often covered in the lease agreement, so that things like oil changes will be covered by the dealer instead of you.
Is leasing a car a waste of money?
Although many people who oppose leasing say so, it’s often untrue. Leasing keeps you in a newer and more reliable car, entails fewer maintenance costs for you to worry about, and typically requires lower monthly payments than a car loan for a comparable car. Moreover, once the lease is up, you have the option to buy the vehicle at the residual value.
Do lease payments go towards the purchase?
Lease payments do not directly go towards the purchase of the vehicle you are leasing. But once the lease has expired, you will have the option of purchasing the car at its residual value, a value that is in most cases close to the market value. In a roundabout way, then, your lease payments can go towards the purchase; but only if you choose to buy. If you simply return the car, the lease payments will not have served even as a preliminary to purchasing the vehicle.