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Car leasing has been increasing in popularity in recent years. As more people understand how it works, more people lease cars. There is still a common misconception out there that car leasing is bad, but the reasons are pretty misguided.
Background: What is a Car Lease?
Leasing is actually pretty simple. The bank (or lessor) essentially rents the car to the person who will be using it (the lessee). This “rental” agreement allows the lessee to use the car for an agreed amount of time and with certain restrictions, such as the number of miles that will be driven and the lessee paying for significant damage.
When you lease a Honda or any other new car, the leasing company buys the vehicle from the dealership and leases (rents) it to you.
There is a risk to the leasing company that the lessee might damage the car or not make payments, which is why a credit application is always needed.
Generally speaking, car leases are calculated based on the amount of depreciation the bank estimates will occur during the lease term. Rather than paying for the entire cost of the vehicle, a car lease pays for the car’s depreciation over your term length.
Leasing is like a long-term car rental
When you lease a vehicle, you are only paying for your usage of the vehicle. Think of it as a long-term rental, from the leasing company to you. You’re paying for the depreciation of the vehicle during your use and the financing and taxes associate with that usage.
Your usage is defined at lease inception with mileage limits and your term length. At the end of your lease contract, you return the vehicle to a dealership, who returns the vehicle to the leasing company.
In contrast, when you purchase a vehicle, you are paying for the entire cost of that vehicle, plus any financing or taxes. Once you pay off the bank, you own the vehicle outright and can do with it as you please.
What companies lease Hondas?
For a new Honda that you lease from a dealership, the leasing company is typically Honda Financial Services, which is a branch of American Honda Motor Co., Inc (the company most people just call “Honda”).
The dealership doesn’t actually own the leased vehicle, and you don’t make payments to the dealership. Instead, the dealership is a partner of the leasing company, and has its own contracts with them about handling lease returns and so on.
In theory, anyone can start a company that leases cars. Some banks, like US Bank and Wells Fargo, do car leases. There are also private companies like “Bob’s Auto Leasing, MN” (we just made that one up) that lease cars. However, in our experience, your best bet is to stick with the manufacturer’s own program.
Car Leasing vs. Buying: Which is Right for Me?
Deciding whether or not you should lease or buy is entirely personal.
Leasing might be right for you if:
- You like the idea of driving a newer, nicer car more often. Most Twin Cities area drivers who choose to lease from us here at Buerkle Honda cite the ability to drive each vehicle at its prime as being a major determining factor as to why they lease. If you would buy a new car anyway, leasing can be an easy way to go. The typical lease runs 36 months, with many lessees choosing to upgrade their vehicle between the 30- and 36-month mark.
- You drive no more than 12,000 to 15,000 miles each year. The typical lease agreement requires you to stay under the 12-15K mile cap. If you exceed this, you will be asked to pay accordingly when the lease agreement is up, often $0.10 to $0.20 per mile. On the other hand, Honda’s current over-mileage charges (in 2020) are often cheaper than what a mile costs in average depreciation if were to buy the same Honda new, then drive it that much and try sell it later. Ask our sales team for advice on the specific vehicle you are considering.
- You don’t have a down payment or trade-in, and want to keep your monthly payments to a minimum. All else being the same – the same finance period, the same exact make and model car – your monthly payments when you lease will be lower than they would be had you decided to take the traditional financing route. Essentially, because you’re only agreeing (and paying) to use a portion of the car’s total value, you pay less out of pocket each month than you would were you financing the entire value of the vehicle.
- Worry-free ownership. As long as you are driving a leased new Honda at 12,000 miles a year or less, you will be covered by a comprehensive manufacturer warranty! Almost all non-maintenance items on your Honda will be covered for repairs, including engine, transmission, suspension, and other mechanical components. Just about the only items you’ll ever need to pay for are oil changes and similar small items. At Buerkle we also sell extended warranties should you plan to drive beyond this level of mileage or desire additional coverage.
Keep in mind, car leases of any make almost always include the option to buy the vehicle for a pre-determined amount when your lease is up. If you want to keep your vehicle for a long time, you can still start by leasing it, then if you still like it after three years, you can make the long-term commitment by buying it out.
Buying might be right for you if:
- You plan to buy used. While some companies offer leasing of used cars, it’s really only an option for new cars.
- You’re looking for the absolute lowest cost for your vehicle. There’s no question that on average, driving a well-maintained used car bought when it is several years old is, overall, cheaper than driving the same car brand new.
- You want to customize your vehicle. Leased vehicles are owned by the leasing company, so they can’t be customized freely.
- You have the cash up front and want to avoid paperwork. While a lease isn’t a loan, it’s definitely an ongoing financial commitment, and includes possible fees for damage, mileage overages, and so on at the end of the lease (unless you buy the vehicle out).
- You drive a lot of miles. If you drive a ton of miles (think 40,0000+ a year), a lease might not be the best choice for you. On the other hand, Honda’s current over-mileage charges (in 2020) are often cheaper than what a mile costs in average depreciation if were to buy the same Honda new, then drive it that much.
- You maintain and repair your own vehicles. Part of the appeal of leasing is that you essentially never need to pay for unexpected repairs, and more and more often, even oil changes are covered. If you like repairing your own vehicles, these aren’t really benefits for you, and you’re probably looking at buying a used vehicle in any case.
What it really comes down to is your lifestyle.
Do you like to have the latest and greatest? Or do you look at things from a purely financial standpoint? Are you alright with paying a little more for the things you want? Are you willing to sacrifice ownership for a lower payment? Ask yourself these questions and see if they help.
If you need more assistance deciding whether or not you should lease or buy, contact us. We help people like you every day.
If you’re a math geek and want to dive into the details, you can learn exactly how lease payments are calculated here.
Money downYou can put money down on a lease as well. It’s called “capitalized cost reduction.” For a 36-month lease, every $1,000 down will typically reduce your monthly payments by right about $30. Like when financing a car, trade-in value can be used as money down.
Zero downA “zero down” lease will still have you paying up front. Costs include the leasing company acquisition fee, the dealership doc fee, and the state vehicle registration tax. Your first month’s payment will usually also be due.
Sign-and-driveIn a sign and drive -type lease, the up-front taxes and fees are rolled into the monthly payments, so you can truly sign and drive without paying anything up front. In this case, on a 36-month lease, you’ll make only 35 payments.
Sign and Drive leases are becoming increasingly popular as people prefer to trade upfront costs for an increased monthly payment.
However you would like to lease your vehicle, we will work with you to find the right balance for you.
Where Can I Find a Good Lease Deal?
If you’re looking for a good lease deal on a new Honda, check out our special offers. We post great lease specials on a regular basis to help get you into an affordable new car. If you can’t find what you’re looking for on our website, contact us.