To lease or not to lease...

OK, so it's not as important a question as the one Hamlet was trying to answer, but your decision sure can have a big impact on your finances.

But before you read any further, please note that this article addresses leasing by an individual, not a business.

How do you know if leasing makes sense for you, or if you're getting into something you'll regret a few months down the road? A lot depends on being honest about your lifestyle, your finances, and your future plans.

Here are some popular ideas about the benefits of leasing:

• I get more car for my monthly payment than if I took out a loan


• I get to drive a new car


• My vehicle is always under warranty


• I don't want to have to deal with selling or trading in my vehicle when I'm done with it


• I don't need a down payment if I lease


• I always have a car payment anyway so I may as well lease and drive a better car

Of all of these, the "more car for my monthly payment" is the most popular reason people lease. In the short term, it is true that if you take the exact same purchase price for a vehicle and compare a loan and a lease for the same term (number of months), the monthly payment will be lower for the lease. BUT, before you sign, there's a lot more to look at than just that payment.

So, how do you make a good choice with the "short-term" temptation of a lower monthly payment?

It helps to know as much as you can about the process of leasing. Realize that leasing is NOT flexible - any variation from the term of the lease will cost you. And, you really need to understand the fees associated with a lease before you commit, because those fees can make that lower monthly payment much less of a bargain.

Here's something that should prompt you to do your homework before making your decision. The popular financial author Suze Orman had the following to say about leasing in an article on Yahoo Finance, "In my opinion, leases are a drug for status-conscious people who need the rush of driving a 'nicer' car than they can really afford. The auto-financing folks have basically perfected a way to let you think you can have your cake and eat it too. Can't afford to buy a BMW or Lexus? No problem, just lease it!

Well I am here to tell you it is a very big problem. The car dealers can make the cake pretty enticing, but if you really understood the true financial cost - not to mention the risks you are taking - you would be sick to your stomach."¹

Here are some aspects of leasing that deserve serious thought:

Mileage Restrictions
All leases have annual mileage restrictions. You can pay for additional mileage, but even then, is your life that predictable? You should NOT lease unless your lifestyle is extremely stable and you can reasonable predict the number of miles you will drive.

Are you sure you're not going to change jobs and have to drive more miles to work than you do now? There's no chance you're going to relocate to another state in the next couple of years? Your child isn't going to join a sports or dance team and you'll be driving endlessly around to events? If you exceed your mileage limit, you will pay a fee for each additional mile. That can add up quickly and eat away at your monthly "savings."

Insurance
Make sure you do your research on insuring a leased vehicle. Most of the time, the insurance requirements are higher (100,000/300,000 vs. 50,000/100,000), there may be a required deductible, and the premium may be higher for the same vehicle if it's leased rather than purchased.

Wear and Tear Restrictions
This is where you can be in for some unpleasant surprises at the end of your lease term. Any car that's been driven for a couple of years has a little wear. The decision as to whether your wear is "excessive" is subject to interpretation by the lease company. Worn mats or dings could cost you and balance out that low monthly payment that was so attractive when you signed the lease.

It's not uncommon for someone who is getting ready to turn in a leased car to spend money on a high-end detailing to avoid being assessed for excessive wear and tear. There's nothing wrong with that, but it's a cost that also reduces the savings from leasing.

Service Restrictions
Some leases will require you to perform all service, including oil changes, at the dealership. Make sure the cost and the drive are worth it.

Inception Fee
This can be as high as a down payment. But, you never get it back because you never own the vehicle and therefore you can't sell it.

Return Fees
Variations include disposition fee, termination fee, and turn-in fee. Generally, if you return a leased vehicle and don't purchase or lease another vehicle, you'll owe a fee.

Choices

• You can't get out of a lease without paying to get out. If you think there is a chance you might have to end your lease early, you shouldn't lease. If you finance, you can trade in or sell. If you decide that you'd rather not have a car payment, you can keep a car you've financed until it's paid off.


• You can't customize or modify a leased car.

Ultimately, the decision whether to lease or finance is up to you - neither one is absolutely wrong or absolutely right. Just make sure that the immediate lure of a lower monthly payment isn't the only factor in your decision. If you'd like to discuss financing options before you shop so you're not making a decision on the spot at the dealership, call First Reliance Bank 888.543.5510 and speak to a Personal Banker. You can discuss the real cost of financing vehicles at different price points and terms and shop with confidence.

If you do decide to lease, make sure you negotiate the purchase price of the vehicle as if you were going to buy.

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EXTRA: What's Suze Orman's solution for wanting to drive a high-end car but have reasonable payments? Buy what she calls "new used" - a vehicle that is one or two years old with low miles

¹ http://biz.yahoo.com/pfg/e16buylease/ Yahoo Finance, Money Matters with Suze Orman, The Buy vs Lease Decision, March 31, 2011