I had a caller to my radio show wanting to purchase a car for his 21-year old son who was in college. I asked him if he had considered leasing a new car for him, to which he said no and seemed very leery of leasing overall, primarily because he had never done it. He made the comment “after 3 years, you don’t own anything”. He is correct, but if you finance for five, six, or seven years, you don’t own anything after three years either. After a few minutes of chatting, he is going to look into it and read the leasing section on my FAQ page.
Leases and First-Time Buyers
Too often, people don’t consider this option, but for many families, it makes a lot of sense for young people to lease, even first-time drivers, but certainly for those who are headed off to college or out into the workplace.
First, consider the lower cost of the purchase. Lease payments are often substantially lower on leases than finance contracts, especially 60-month loans. You are usually looking at no maintenance costs, just gas and a few oil changes. The leased car is almost always under warranty for the full term of the lease.
Loans vs Leasing
For me, the most important thing, as I explained to the caller, was that to young people, a standard loan will get them into a situation with no way out and it is common for their circumstances to change. A 21-year old single student could easily be married with children on the way just three years later. On a finance contract, they could easily be stuck with a car that is not usable to them.
As long as the young people stay within their mileage limits, and don’t tear the car up or abuse it, we know that at the end of the lease they will at worst be breakeven in the car, at best will have equity to use for the next purchase or lease. As a parent or relative, it is also a good idea to put them on the lease agreement as a co-buyer to establish credit for them, which will get you off the hook for the next loan or lease.
If you were going to pay cash for a car for the youngster, look into a pre-paid lease, you can save additional money and keep as much as 40-50 percent of your cash for other things, even drawing interest in a bank or savings account.
Important Things To Consider
Are there things to be cautious of? Of course, the mileage limits are a big one. The standard mileage on a lease is 15,000 per year, but if your calculations show they will be driving less than that, you can set the miles lower to make the lease payment less.
Check with your insurance agent to see if leasing causes an increase in premiums, sometimes it does, so be sure to check that out.
This plan will not work for every situation, but for many, it will and those people will reap the plus sides of leasing.
Photo Credit: michaeljung/Shutterstock.com.
