Ask Money

Lease a car

Chris Farrell Jul 26, 2010

Question: My wife and I both have older cars that are paid off and are considering upgrading one of the cars to something newer. The car we would trade in/sell is a little over ten years old and our main motivation is to get something for it now rather then waiting for it to be worthless (have repair upkeep costs greater then its value). My first question is: Is that logic flawed? And secondly one of the options we are considering is leasing a new car, but it is tough to discern when you would choose a car lease over a purchase. Joel, Saint Paul, MN

Answer: I don’t have any problem with your logic. It’s a good move, financially.

You probably don’t need me to tell you this but I will anyway: I’d go with a fuel efficient vehicle. It’s good for the environment and your wallet. I’d not only steer clear of cars that end up in the shop a lot, but I’d also avoid cars with a high cost of repairs. Stay away from any vehicle that’s expensive to insure (and cars that are expensive to repair have higher insurance costs).

As for the financing, it’s always cheapest to buy a car with cash, but it isn’t always practical. But I’m no fan of leasing. When you lease you essentially rent a car for three years. You don’t own it. You return the car at the end of the lease. Of course, you can choose to buy the car at that point, but many people simply lease another vehicle. Leasing turns into a world of perpetual car payments. Leasing also encourages buying more car than you need. Leasing is too complicated. The Federal Reserve recommends that anyone contemplating a lease should take the following factors into account.

• the agreed-upon value of the vehicle-a lower value can reduce your monthly payment

• up-front payments, including capitalized cost reduction

• the length of the lease

• the monthly lease payment

• any end-of-the-lease fee and charges

• the mileage allowed and per mile charges for excess miles

• the option to purchase at the end of the lease or earlier

• does the lease include “gap” coverage that protects you in case the vehicle is stolen or totaled in an accident

Let’s keep it simple. If you need to finance the car purchase stick with a loan. Shop for the best terms. Don’t take out a loan longer than three years. Put as big a down payment as you can. Pay the loan off as quickly as possible.

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