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July 01, 2011

To Lease or Not to Lease – That is the Question

Allstate1 You’re ready for a new car. Great! But for every one friend who says buying a car is the way to go, you have another one telling you to lease. What to do?

Leasing is on the rise—more than one in four consumers now lease their ride in the U.S., and the number of women who lease is growing. LeaseTrader reports that 51.2 percent of the website’s current luxury car leasers under 30 are women—an almost eight percent increase from the prior year. And, more women are leasing cars overall. While leasing is on the rise for women, the question is—is it right for you?

Before we answer that question, let’s make sure we are clear on the terms frequently used with car leasing. Leasing is a little like renting a car. When the lease comes to an end, you return the car to the dealer. If the car is in good condition and you have not violated the lease terms, you owe nothing. But, you also own nothing for all of the payments you have made. You must then choose to buy/lease another car. In some cases, you also have the option to buy the car at the lease-end price.

So, why do people say leasing is complex? Because it all comes down to the contract terms. The advertised lease rates for a car do not include sales taxes and other fees. In addition, there are four key parts of the contract that affect the total monthly least payment that you make:

  1. Lease length
  2. Number of miles
  3. Drive-off fees
  4. Interest payment

If you think leasing might be right for you, here are a few important questions for you to ask of your car dealer:

What is the term of the lease? Don’t accept a lease term longer than 36 months. That way, your car will always be covered by its three-year bumper-to-bumper warranty.

What is the maximum mileage and the penalty if you exceed the number of miles included in your contract? For example, a typical lease allows 12,000 miles for the term of the contract, with a penalty of 15 cents per mile after that.

Is gap insurance included? Gap insurance covers the difference between what your car is worth and what insurance companies will pay if your car is totaled.

Does the lease require a large down payment (sometimes called a “cap reduction”)? Is the monthly payment too good to be true? Beware of very low monthly payments, which typically require larger “drive-off fees” (the amount of money to begin the lease).

Once you’ve negotiated all of the numbers, you can use this helpful calculator to get a better idea of your actual leasing costs. Always check the numbers on your own to ensure there has not been an error or a misunderstanding about the terms you want.

Deciding if you should lease or buy is as much a personal decision as it is a financial one. If having a new vehicle every two or three years with no major repair risks is important, leasing might make more sense. This is true if your car needs will be changing in the near future (can someone say minivan?). On the other hand, buying is usually more economical in the long run—especially if you will soon have a teen driver and be in need of an extra car.

By asking questions and running the numbers, you’ll be sure to get the deal that works best for you.

Palatine Content provided by George Palatine, Allstate Insurance Company, Northbrook, IL
Palatine is a recognized expert in social marketing, SEO, online informatics and the power of content to engage, inform and entertain customers and business partners.

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