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What are the Economics of Leasing a Car?

Posted by Wilmar, Inc.

 Economics of Leasing a Car

If you could acquire a new vehicle after a few years, with the most advanced technology and features and an affordable monthly price, would you? Leasing helps you enjoy this luxury, but you must know the best approaches to get the most benefit.

Be leasing, you'll get your preferred vehicle, but you must work within a fixed mileage and duration (months). It works the same way as when you opt to rent an apartment rather than buy a home. The commitment involved is less long-term, but you must make the appropriate payments. Overall, the monthly cost of leasing is usually lower than acquiring an auto loan.

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A recent report by Experian dubbed the State of the Automotive Finance Market notes some eye-opening findings. According to the study conducted in the first months of 2020, drivers saved about $103 on every monthly payment on the ten most leased vehicle brands. 

The Economics of Leasing a Car – How Does It Work?

Typically, leasing a vehicle comes with a three- or four-year contract covering different items as the monthly payments and expected depreciation. The dealer begins with analyzing the value of the car you wish to acquire versus the residual value to determine how much you'll pay every month. Of course, the residual value will be lower when the lease finally expires.

For instance, you want to lease a new vehicle worth $50,000, and the dealer comes up with $30,000 as the residual value after three years. In this case, the use or depreciation will be $20,000. Divide this by 36 months; you'll find the monthly payment to be $555.

You're responsible for the finance charges as well. Just like in a vehicle loan, you'll pay a relatively lower interest rate if you have a higher credit score. You'll also spend some cash to cover tax and some fees before driving off.

During the lease, you're required to take care of the vehicle and follow the service schedule as recommended by the manufacturer. At the end of the lease, you can choose to buy it as a certified pre-owned vehicle.

Should You Buy or Lease a Car?

Buying the vehicle is the most straightforward approach to acquiring a car. You'll either pay the cash or seek out a loan to cover the expense. But based on your particular situation, the drawbacks of this approach could outweigh the benefits.  

Buying a car means you'll own it, and you'll be ultimately free of the relevant payments until you choose to acquire a new ride. You can sell it any time, and there's no fixed ownership period you must work with. The relevant insurance premiums are typically lower than when you lease. What's more, you can rack up the mileage and don't have to worry about restrictions or financial penalties.

However, buying a vehicle can overwhelm you. In fact, the pleasure of finally getting your dream ride can be easily clouded during price negotiations and financing decision-making processes. Presumably, paying down the car loan allows you to build equity. Unfortunately, it's not guaranteed that things will work like that.

When you buy the vehicle, the payments reflect the car's entire cost amortized for four to six years. However, depreciation can take a nasty toll on the overall value, particularly during the initial years. If you have a down payment, you could end up financing a significant portion of the asset.

In the debate of leasing versus buying a car, the former offers the significant upside of lower monthly payments. You can easily manage your finances and work within your budget. If you hope to cruise in an advanced, high-end vehicle, you're likely to find the monthly lease payments to be more affordable than providing a massive down payment for the car and paying off the loan.

Since you'll be renting the vehicle for a fixed duration, you'll only pay for the depreciation or usage. You'll not absorb the full depreciation; hence you'll never find yourself in an "upside-down" position. Business owners, particularly, enjoy tax benefits when they lease a vehicle for business purposes.

Leasing's primary setback is that you'll never own the vehicle, but you can opt to finance the remaining value at the end of the lease period. The mileage restrictions are also limiting. If you drive a lot, then it would be better if you just purchased a vehicle. Finally, leased cars come with higher insurance coverage costs, but these can be nominal based on your driving record, place of residence, and age.

You're in Safe Hands

If you're looking for a reliable agency to manage your company vehicles and offer the right solution for fleet selection, analysis, and management, then you're home. You can count on Wilmar for all your business vehicle and equipment needs, from leasing to maintenance and repair.

Contact us today so we can discuss your needs and find the appropriate solutions.

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Topics: Fleet Financing, Vehicle Leasing


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