If you're trying to cut corners by leasing a new car, as opposed to buying one outright, be sure you actually are reaping the benefits.
According to a new study from Edmunds.com, U.S. Millennials (those between the ages of 18 and 34) are more likely to lease a car than older generations. The company analyzed data from market research firm IHS Automotive, which showed that leasing made up 28.9 percent of all new car purchases from millennials in 2015. That's above the standard lease rate of 26.7 percent across the industry overall, and represents a 46 percent increase in millennial leasing since 2010.
The decision to lease a car is more appealing for many financial reasons. For one thing, you can drive a luxury car for less money than if you'd purchased it outright. When leasing, the consumer pays a percentage of the car's price in monthly installments, as opposed to taking out a loan based on the full price.
You can also trade out your model for something sexier at the end of the lease without incurring the costs associated with selling the car. Generally, a lease lasts for three years. Millennials veer most towards the luxury Lexus IS, Mercedes C Class, Infiniti Q50, Lexus RX, and BMW 328 brands, according to IHS Automotive data.
Still, there are a handful of hidden costs--and other potential snags--to be aware of. If you're an urban-dweller, it's also worth noting that leasing a car could end up being significantly more expensive than taking public transportation--especially if your company offers a commuter benefits plan.
Here are some important things to remember before you sign a leasing contract:
1. Calculate your budget
Millennial shoppers would be willing to fork over as much as $299 monthly, which may end up being a $35,000 car purchase, the Edmunds study finds. That's $15,000 more than the average amount they'd pay to own a car.
Still, traditional wealth advisors say it's smarter to limit your budget to no more than 20 percent of your net income. That way, if you break your lease, you still have room to compensate. In that case, it's a good idea to use websites like SwapaLease or LeaseTrader to help you to minimize those costs.
Generally, the monthly cost of leasing a car comes down to the difference between the capitalized cost (the selling price) and the car's residual value (i.e., the estimated worth of the car when your lease is up), plus an interest charge.
Before you commit, make sure you have a quote so you can negotiate with the dealer for the best deal. Sites like TrueCar and Kelley Blue Book can help you with that. Edmunds.com also has an "online lease calculator" tool.
2. Factor in the details.
Keep in mind that most lease agreements have a set mileage plan: You can go up to 12,000 miles each year for three years, or 36,000 miles total. Every extra mile you drive will typically cost you 10 to 15 cents more, unless you pay for more mileage up front, when it usually only costs 5 cents per extra mile.
There are other hidden costs to consider: The sales tax, for instance, can be hefty, and you'll also have to pay a sum in "drive-off fees." (No matter what the dealer says, Edmunds recommends paying no more than $1,000 on-site.) Additionally, insurance plans on leased cars tend to be higher than purchased ones, since the company's liability is higher.
As the lessee, know that you're responsible for maintaining the car. "It's not like you can call the landlord to fix the plumbing," says Michelle Krebs, a senior analyst at AutoTrader. She notes that customers can be more than just "nickel-and-dimed" for the upkeep.
Make sure that you can afford to get the oil changed regularly, and are prepared to cover any damages to the fabric or leather of the seats, as well as any dents on the fenders, etc.
3. Consider what buying a car would get you instead.
By leasing, you forego the possible fiscal gains of being a car owner. You're not building up equity, and when the lease ends, you'll have to make new payments for a second lease, or take out a loan to buy your previous car.
Still, for Millennial shoppers with satisfactory credit and less in savings than those fiscally-savvy baby boomers, leasing a hot Lexus could be a good (short-term) solution to your commuter woes.