Should I purchase or lease? That is a question many vehicle buyers ask themselves. There are some who do nothing other than lease and some who will only purchase. Then there are those who do not know what they should do. There was a time when leasing left many with a bad taste in their mouth, and for good reason. Payments are always a consideration for a consumer unless they are paying cash for their vehicle. Many lease companies used to do what is known as an open end lease. You could adjust your monthly payment by simply adjusting the residual (future value) of the vehicle. In so many cases, the adjusted residual value was less than the current market value of the vehicle at time of lease end. Where the issue came in for the consumer is that they were responsible for the future value of the vehicle. This left many consumers in the precarious position of owing more than the vehicle’s value. With an open end lease just as a purchase, the consumer was responsible for lease payment and the residual value of the vehicle.
Times have changed. Leases have become much more consumer friendly. Most lease companies do what is called a closed ended lease. That is a lease where the residual value is guaranteed by the lease company. In other words, the consumer is not responsible for the future value, the lease company is. Should you decide to purchase the vehicle (one of four options at the end of lease term) at the end of your lease and the balance due is greater than the vehicle’s value, you simply walk away and the lease company loses the money, making a lease far more consumer friendly.
As mentioned, the consumer has four options at lease end. (1) You may purchase the vehicle for the residual value that was set at lease inception. This is a viable option if the vehicle is worth at least what the residual value is and you want to keep the vehicle. (2) You may use it as a trade in if there is equity. That is if the vehicle is worth more than the residual value. (3) T he vehicle can also be sold just as if you purchased the vehicle. This is a great option if the vehicle’s retail value is greater than the residual value. When this option is exercised, you get to keep the profit for yourself. (4) You can simply walk away from the vehicle and give it back to the lease company.
The best deal is a deal where all the players have a positive outcome. A vehicle transaction is no different. Everyone, the consumer, the dealer and the manufacturer all have an advantage when you lease a vehicle.
- Typically a lower payment with a shorter term. No concern about the trade value in the future.
- Fits into the average trade cycle.
- Under warranty all or the majority of the time.
- If driving more than average miles, the miles will cost less. You pay for high miles one way or another even if you paid cash for the vehicle.
- With many lease companies, gap insurance is part of the lease.
- The least expensive way to drive the vehicle for the time you have it.
- Little to no money out of pocket.
- Wear and tear forgiveness that does not affect the future value.
- Lease end options, Purchase at the end, trade, sell or walk away.
- Tax savings, you only pay taxes on the monthly payment.
- Higher customer satisfaction.
- Leasing has a significantly higher retention rate.
- Promotes Higher CSI.
- It helps sales staff build a book of business, promoting retention.
- Helps dealer project sales.
- Warranty work in service.
- Quality trade of off lease vehicle in the future we originally sold and serviced.
- Do not have to deal with future trade issues.
- Builds a great relationship with the customer due to higher CSI building a loyal customer base.
- The dealer gets paid the same, lease or purchase.
- Helps the factory with projected sales for the number of vehicles they need to build, based on average lease retention statistics.
- Loyal customer base.
- Many vehicles are purchased by the dealer, limiting the number of vehicles at auction. This improves re-sale value, building brand value.
For most folks, the average trade cycle is approximately 38 months. They never keep the vehicle the full term of the loan. Making a lease fit into the average trade cycle.
When negotiating the next vehicle purchase, it seems the trade is very often an issue. You don’t get what you owe for the vehicle, leaving you in a negative equity position. This is alleviated with a lease, since the future value is guaranteed.
Most people want to pay the least amount possible for a vehicle for the time they have it. This makes a vehicle lease a very viable option, especially when you consider lease payments, in most cases lower than a purchase payment.
There are typically many questions people have about leasing. Please feel free to direct any questions you may have when trying to decide.