Getting a new car is a big decision, and you should choose your next vehicle carefully. But if you think finding the right car is difficult, deciding whether to lease or buy can be even more overwhelming.
While leasing isn’t for everyone, it does offer a few distinct advantages over traditional auto loans. If you do decide to lease, you need to ensure you’re getting the best deal possible.
Here are four things you need to do before you lease a car.
1. Make Sure a Lease is Right for You
Leases offer some advantages over buying. The down payment and fixed monthly payments for a lease are typically lower than the cost of financing. You get to drive a newer car, and many repair costs may be covered by the manufacturer’s warranty or the lease agreement.
However, leases also come with many limitations and the potential for additional costs. If you exceed a lease’s mileage limit (typically between 10,000 and 12,000 miles per year), you’ll pay a fee for every additional mile. You’ll also be charged for extra wear and tear and you aren’t allowed to modify the vehicle. If you decide the car isn’t right for you, you’ll pay a steep penalty for terminating your lease early.
Despite the lower monthly payment, the lifetime cost of leasing is generally much higher than buying, especially considering you don’t own your car at the end of the lease. Before you decide if a lease is right for you, make sure to understand the pros and cons of leasing.
“Consumers need to fully understand any potential cost on the back-end and be sure they can meet the terms of the lease – such as mileage limits and wear and tear,” said Melinda Zabritski, Senior Director of Automotive Credit for Experian Automotive.
2. Check Your Credit
Your credit score plays a key role in the lease you get. “There are different tiers of credit that will be evaluated,” said Scot Hall, Executive Vice President of WantaLease.com. “If you have better credit, you will get better rates unless it’s a dealer-subsidized lease.”
Before you apply for a lease, you should check your credit report, giving yourself plenty of time to dispute and fix any negative mistakes. You should also check your credit score; while scoring models differ depending on the lease, you will have an idea of where you stand.
Depending on your credit score, it may be easier to qualify for a lease for certain vehicles. For example, Experian Automotive found that the average credit score of someone who took out a loan for a new Volkswagen Jetta in the fourth quarter of 2014 was 715, while the average credit score for a lease was 692. For a new Jeep Grand Cherokee, the average credit score for a loan was 735, while the average credit score for a lease was 728.
3. Know What You Can Afford
One of the biggest advantages of leasing is that you might get a lower monthly payment. According to Experian Automotive, the average monthly lease payment for a Jetta in the fourth quarter of 2013 was $287, while the average loan payment was $389. For a Grand Cherokee, the average lease payment was $470, while the average loan payment was $611.
Leases are cheaper because you’re only paying for the depreciation of the car’s value, plus interest, taxes, and fees. With a loan, you’re also paying off the entire purchase price of the vehicle.
These monthly costs don’t take down payments or trade-in values into account. While leases typically have lower down payments, you’ll have to turn in or buy your car when the lease is up, with no property to show for it.
Before you choose a lease, consider the down payment, monthly payment, and maintenance costs you can afford.
4. Shop Around for a Car and a Lease
Auto loans can be found at banks, credit unions, car dealers, and online. Leases, on the other hand, are largely controlled by the manufacturer. “Nearly all leases are done on a captive basis,” said Hall. “Ford Motor Credit Company does most of the leases for Ford vehicles.”
You may be able to get a better deal if you consider vehicles from different manufacturers instead of sticking to one make and model.
The manufacturer will consider your credit, debt-to-income ratio and the “lease-to-value” ratio (how much you are financing compared to the vehicle’s value), said Hall. If you are having trouble qualifying, you may need to put down additional money or get a co-signer.
Just like auto loans, you can negotiate the purchase price of a leased car – so if you aren’t getting the deal you want, make a counter-offer or keep looking.
If you aren’t ready to commit to a two-or-three year lease, you can even take over the remaining term on someone else’s lease. As long as your credit is in the same tier or better than the person whose lease you are assuming, you shouldn’t have much trouble qualifying, said Hall. Sites like SwapALease.com and LeaseTrader.com help connect consumers who want to get out of leases and consumers who want to assume one.
This article has been updated. It originally ran on March 20, 2014.
The post 4 Things You Must Do Before You Lease a Car appeared first on Credit.com.