- Leasing a car allows drivers reliability
and luxury, all with a low monthly payment.
But in this video, we're gonna be talking
about how car leasing works
and why the low monthly payment
doesn't always equal low cost.
(gentle music)
Hey, guys, welcome back to the College Investor,
investing and personal finance for millennials.
We're gonna be talking about car leasing.
This is a big topic because I know
a lot of us get really close and sentimental
with our cars and there's some sort
of flashiness with car leasing, right?
You get to jump into oftentimes a luxurious vehicle,
drive it around and in that purchase price,
you get to take it to the dealership
for service and repairs and that's just covered.
Well, I wanna talk about more
than just that monthly lease payment
because there's actually more cost
that goes into car leasing.
So when you lease a car, you're actually paying
to drive the car.
So you pick out a car, you put a lease on it
and then you're paying every single month
to drive that car and that is it.
You're actually not putting any money
towards purchasing that vehicle.
You're just simply paying to drive the car
and that can be a very expensive way
to get around in driving a car.
Also when you lease a car,
you're driving it up to a certain amount of miles.
Oftentimes these leases will have mileage caps
and if you go over, you know, 10,000 miles
in the year, you're gonna have to pay excess
for that mileage and cover that cost.
Now when you're done with the lease,
you simply return it to the dealership
and then you can move on.
Speaking of moving on.
There's actually three different options
that you have when your lease is up.
The first is to actually go ahead
and purchase the vehicle outright.
Now the cost of that vehicle
is going to be determined in that original contract,
so make sure you are pouring over those terms
if you have just a little inkling in your head
if you are going to want to purchase
that vehicle at the end of your lease.
So this could be an option for you
if the car's value is worth more
than what that lease purchase price is
inside of the contract.
Your second option is you can just
walk away from the vehicle.
You just do your lease terms,
you return it to the dealership
and there's no obligation to re-up
that lease or do something else
or purchase the car.
You can just be done with it and return the car.
And then your third option is to just
start another lease and do the whole process
over again with another vehicle.
And if you've already done a lease with them before,
you may have more negotiation power
to determine what that lease monthly payment is
or maybe avoid some of these upfront charges.
That is also an option.
And speaking of fees, let's go ahead
and talk about the charges because it really is
more than just that monthly lease payment.
You'll also have an up front charge.
It's typically called
the capital cost reduction charge.
Now it's not a down payment,
but it is money that you put down up front
and it can slightly reduce your monthly payment,
but understand that you don't get that money back.
That money is just gone.
Then there's the monthly lease payment,
the actual monthly payment amount
that you put towards driving that leased car
every single month.
Now that includes depreciation,
service and insurance,
interest fees,
use tax
and GAP insurance.
And then lastly, you'll have end of account charges,
so as I was mentioning,
if you go above that certain mileage criteria
within the year, you'll have to pay
for any excess mileage
that you put on that leased car
and pay for that.
Also if there's any unusual damage
and that's all outlined in your contract terms.
Remember to make sure to read over all of that
because if there's any damages
to that car, you could be on the hook
for paying addition to cover the cost of repairs.
So you may be wondering.
Will I lose money by leasing a car?
And the short answer is yes.
Car leasing is very expensive
and maybe I could understand if you
are making mad money and you don't have
to drive very often and you just want something
for fun to putz around in for a year or two,
maybe I could see that,
but very rarely does car leasing
actually end up being a good idea,
because you're going to lose money on this.
Now, there's a couple of general rules of thumb
when it comes to car buying.
The first way that you could buy a car,
because buying a car is going to be
a lot better idea than just leasing a car,
so if you're gonna buy a car,
your first option is to do a 20/4/10 rule.
So that's 20 percent down, four years financing
and the car payment is 10 percent of your take home
and so that could be an option for you.
Your second option is the 10 percent rule.
Now I doubt that there's going to be
a lot of people that fall into this camp,
but basically the 10 percent rule
is to purchase a vehicle
that is 10 percent of your annual income.
So let's say you make $50,000 a year,
then the 10 percent rule would be
to buy a car that's worth $5,000.
Now, I don't know very many people
who adhere to this type of rule,
so then there's the 1 percent rule,
which would be to divide the monthly payment,
we're going back to car lease option,
divide that monthly payment by the sticker price
of that car, the MSRP,
and if the ratio is 1 percent or less,
then the lease is okay,
a deal that you could consider
if you were going to lease.
But, the last option and the one
that I personally use is to buy your vehicle outright,
in cash, so you have no car payment,
you're done with it in one fell swoop
and you are moving on with your life.
With no car payment in mind,
that means that you get to put
your monthly payment that you would have spent
on a car towards other financial goals
that are really going to build
and increase your net worth
or do something that you truly love
instead of putting it towards a car payment.
Now I get it, car buying and car leasing
is a very personal choice
and it can be an emotional one.
We spend a lot of time in our vehicles,
commuting to and from work,
picking up kids, going to the grocery store,
so you have to do what's best for you.
But if you want more information
on car buying, car insurance,
how to save for a car,
then make sure you check out
all of our free resources on the collegeinvestor.com.