Big Change, New Wheels

    As you adapt to the major life changes associated with a divorce, you may determine that you want or need to acquire a new car. Your main options include buying a new car, buying a used car, or leasing a car. Choosing the right option will depend on your financial situation, credit score, driving habits and needs. 

Once you start shopping around, you’ll discover what appear to be attractive vehicle leasing offers, with low monthly payments. Don’t be fooled! Before you opt to lease, keep in mind that from a financial standpoint, this is not the perfect option, especially if your financial situation or driving needs will be changing dramatically in the next three to five years. 

A vehicle lease is a legal agreement between the lessor and the lessee (potentially you) related to the use of a specific vehicle. A lease involves a detailed contract that specifies the terms and limitations of that use, the length of the agreement, and the monthly payment for use of that vehicle. It’s much more of a complex process than renting a car from Hertz for the weekend. As the lessee, you’ll be taking responsibility for the vehicle for a period of 24, 36, 48 or 60 months (sometimes longer). 

For this reason, you should not even consider leasing if you have poor credit or an unstable income that won’t allow you to make on-time monthly payments for the duration of the lease period. When you lease a vehicle, you have absolutely no ownership of it whatsoever. The vehicle must be returned to the lessor at the end of the lease period. It’s the leasing company that purchases the vehicle on the lessee’s behalf and retains ownership of it. While you’re in possession of the vehicle, however, you must pay to maintain it, plus pay for the insurance. 

“Leasing a vehicle is best for someone with good credit, consistent driving habits that involves traveling relatively few miles, and who has a financially stable lifestyle. It can be extremely costly to end a lease early,” explained Al Hearn, editor-in-chief of LeaseGuide.com. “Once you accept a leased vehicle and have signed the leasing agreement, you’re committing to keep that exact vehicle and make all of the monthly payments associated with the lease.” 

Details about your ongoing payments will be reported to the credit bureaus, appear on your credit report, and impact your credit score, just as financing a vehicle’s purchase would. In almost every situation, the monthly payment associated with leasing a vehicle is lower than the monthly payment related to buying an identical vehicle and financing the purchase. There are, however, additional costs involved. 

Before signing the lease there are several important factors to consider that impact your costs, including:
 
1. The “Capitalized Cost” (also referred to as “Cap Cost”) of the vehicle you’ll be leasing.
Just as you would when buying a new car, you’ll want to negotiate with the dealership to get the lowest price possible for the vehicle being leased. The lessor will be purchasing the vehicle on your behalf for the price you negotiate. This will impact your monthly payment. 

2. The vehicle’s “Residual Value.”
This represents the difference between the purchase price of the vehicle and the anticipated depreciated value of the now used vehicle once the lease period is over. This is determined at the beginning of the lease and is used to help calculate how much your monthly payments will be. Every vehicle make and model depreciates at a different rate. For example, two vehicles might start off costing $24,000. After three years, however, one might be worth $20,000, while the other might be valued at only $18,500. As the lessee, you want to choose a car that maintains as much of its original value as possible during the lease period in order to keep your costs and monthly payment down. “Luxury cars, like Mercedes-Benz, BMW, Lexus and Acrua, tend to hold their value better. Toyotas and Hondas are also known for maintaining their value,” added Hearn.