The Downside of Leasing Used Cars

You are ready to buy your used car but you can’t decide whether to lease or buy. Before getting talked into a lease, consider the problems one can incur as opposed to buying.

The first consideration is that when you lease a car, you will always have a car payment. As long as you lease your car, you never really own it.

The second is the mileage restrictions of leasing. Most leases restrict your mileage usage to 15,000 miles per year (sometimes even lower at 12,000 per year. If you go over your allotted miles, you pay extra: the going rate is about 15 cents for every mile over your limit, and 20-25 cents for luxury cars. So, if you go over, say, 4,000 miles on your luxury sedan, you can expect to pay about $800 at the end of the lease. Think about how those cell phone minutes add up once you go over your plan and it is much the same.

Third, insurers usually require higher coverage costs for leased vehicles.

Fourth is trying to evaluate what the car will be worth when it’s over a few years old. If you choose a vehicle that is five-years-old, there is a great deal of variation in the five-year-old market. This information is important as your monthly payments hinge on its supposed retained value. If the dealer sets it too low, your payments will be higher than they need to be. If the dealer sets it too high, it gives the dealer latitude to push up the car’s initial price while offering what seem to be acceptable monthly payments.

The fact is that instead of the owner/dealer paying for the most expensive years of a vehicle's life, you will be. The amount for which you lease is the difference between the purchase price and the salvage, or residual, value, which is the predetermined value of the car at the end of the lease period. The amount of the salvage value that the dealer includes in your contract directly impacts your monthly payment.

Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you're driving it. In effect, you are borrowing the money that the lease company used to buy the car from the dealer. You repay part of that money in monthly payments, and repay the remainder when you either buy or return the vehicle at lease-end.

So what are the benefits of buying your used car? By far the greatest benefit of buying a car is that you may actually own it one day. Implied in this benefit is that you’ll become free of car payments. The car is yours to sell at any time and you are not locked into any type of fixed ownership period. If you plan to own your car for at least three years, buying will undoubtedly be the much more cost effective way to go.

Greg Chapman of Greg Chapman Motors is a knowledgeable and leading provider of used cars, trucks, and SUV’s. Since 1959, Chapman motors has supplied reliable used cars in Austin and the surrounding area and is known as one of the bad credit car dealers in Austin. For more information please visit http://www.gregchapmanmotors.com.