Understand Leasing the Easy way

Here is a simplified fictional scenario that explains the fundamental idea behind leasing a car. It’s somewhat over-simplified and not entirely realistic, but it should make the concept easier to understand.

The Example

In our example, a consumer named Alan wants a brand-new car and approaches a dealer salesperson named Jorge. The car Alan wants costs $30,000. Alan also explains that he usually sells or trades his cars every three years, takes good care of them, and drives an average number of miles — about 12,000–15,000 miles per year.

Jorge explains that Alan has three options.

First, he reminds Alan that the average new car driven average miles will lose about 50% of its value in three years. This loss is called depreciation, and all cars experience it. For this example, we’ll use 49% to keep the numbers simple. We’ll also ignore fees, taxes, down payments, and finance charges.

Option 1

Alan can pay $30,000 cash for the car. His payment completely buys the car, and there are no monthly payments. In three years he can sell or trade it for the remaining 51% of its original value after losing 49% to depreciation. The $14,700 lost to depreciation represents the cost of using the car during those three years.

Option 2

Alan can take out a $30,000 loan and pay it off over three years. After the loan is paid, he has spent $30,000 but the car is worth only $15,300 (51%) after depreciation. He can sell or trade it to recover that remaining value, but the other $14,700 is gone. In effect, about half of every monthly payment disappears into depreciation.

Option 3

Alan can lease the car for three years. With a lease, he only pays for the expected depreciation of 49% ($14,700), not the full $30,000 price. He can pay that amount all at once or make monthly payments over the lease term.

At the end of the lease, he can return the car or buy it for the remaining 51% of its original value. If he returns it, the payments covering depreciation are gone — but this is the same amount he would lose with the other options. The difference is that lease payments are roughly half the size of the loan payments in Option 2, and Option 1 doesn’t require a large upfront cash purchase.

Decision

Alan chooses Option 3 — leasing — because it offers a lower monthly payment, requires little upfront cash, and eliminates the hassle of selling or trading a car every three years. He simply returns the car at the end of the lease and gets another new one.

Footnote

For years, Alan had heard from friends and family that leasing is expensive, a dealer scam, or just long-term renting. He was also told it only makes sense for businesses.

However, after discovering LeaseGuide.com, Alan discovered that these common beliefs are often based on misunderstandings. Leasing can work very well for the right people and the right reasons.