car leasing to the dream car: Is the alternative to buying a car worthwhile?

Car leasing: optimal financing or cost trap? – Get to a new car as quickly as possible without having to save long. The dream seems feasible with car leasing. Manufacturers are increasingly luring with supposedly cheap leasing offers. We show whether this form of auto financing is really worthwhile.

What is car leasing?

Car leasing is the rental of a car for a certain period, usually between 2 and 5 years. When leasing – in English: rental – you are not the owner, but pay a monthly fee for using the vehicle. After the lease expires, you can return, buy or continue to lease the car. The monthly costs, the so-called leasing rates, are usually lower than credit rates. However, you have to remember that you don’t own the car at the end of the term – not even partially.

How does car leasing work?

When you lease a car, you pay a monthly fixed rate for the duration of the lease. You receive a leasing contract from a term of 1 year, the most common variant has a duration of 3 years. During this time there is no possibility to cancel the contract. This means that if you can no longer pay the monthly installments, for example due to unemployment, you will not be able to get out of the contract.

Car leasing in comparison – the big end usually comes to an end

Car leasing sounds so good: for a few hundred euros a month, the dream car is available at the door in the optional equipment. What many do not consider, however, are the hidden additional costs and clauses in the different contract variants, which in the end make leasing more expensive than traditional car financing . You should be particularly careful with the following contract components:

• the kilometre clause or kilometre leasing
• the residual value clause or residual value leasing
• hidden costs for inspections, repairs, insurance

Mileage leasing: How the mileage clause can become a cost trap

A common variant of the leasing contract is the one with a kilometre clause, also called a kilometre leasing. Here you agree a maximum number of kilometres that you can cover during the term when the contract is concluded. If you do less, these are financially offset by the lessor. As a goodwill gesture, many leasing companies grant a certain number of free additional kilometres, often between 2,500 and 3,000 kilometres. However, if you exceed this, a multi-kilometre rate will apply, so you have to pay extra. In a medium-sized car, that is between 10 and 15 cents per kilometre driven.

Residual value leasing: conflicts between dealers and customers are not uncommon

With residual value leasing, the contract specifies how much the vehicle should be worth at the end of the term. It is determined whether the scratches in the paint and stains on the covers are still normal wear and tear or whether there is excessive use. There is often a dispute between the dealer and the customer. In this case, an independent appraiser must decide how much the car is still worth.

If you lease a car and the car generates less revenue than planned due to many signs of wear, you have to make up for the loss. So you bear the so-called residual value risk. This is the most common dispute with this variant of car leasing. In practice, it has already happened that dealers set the residual value of the vehicle so high before the rental that it had to be lower when it was returned, so that the customer had to make an additional payment.

Hidden leasing costs

If you lease a car, the supposed bargain can become more expensive than expected due to hidden costs for inspections, repairs, and insurance. You are responsible for the care and maintenance of the leased vehicle during the term. This means that you are contractually obliged to meet inspection dates in the brand workshop. The cost is yours.

You also have to pay for necessary repairs yourself, but you are also obliged to visit the brand workshop, which is usually more expensive than a free workshop. Although many leasing companies offer full-service leasing, which includes these costs, many customers shy away from this service. Because this increases the monthly rate. However, this saves them at the wrong end, because it is often cheaper to pay for the full service than to visit each individual workshop.

In addition, it is often agreed when leasing that the car must be insured with fully comprehensive insurance. You therefore pay higher premiums than with a comprehensive insurance.

What happens at the end of the car leasing period?

The leasing contract between you and the lessor, which is usually an automobile manufacturer or a car dealership, is set for 1 to 5 years. When the lease expires, you have two options:

Possibility 1: You extend your leasing contract

If you would like to continue leasing the car, you can conclude a follow-up lease contract. The new leasing rate is then based on the residual value of the vehicle and is therefore lower.

Option 2: You buy the car

If you want to buy the car after the term, you should have agreed this with the leasing company when you signed the contract. So-called balloon financing or final installment financing is often used.

With this financing option, you only pay off the vehicle to a small extent during the term and pay the remaining amount at the end of the contract using a high final rate. With this variant, take into account that, on the one hand, you have to pay the leasing installment during the term and you may have to save the final installment at the same time.

Option 3: You return the leasing vehicle

When you return the vehicle, it depends on the condition of the vehicle and the kilometres traveled, whether you get money back or whether you have to make an additional payment.

Car financing is often cheaper than car leasing

If you plan to take over the car at the end of the term against payment of a final installment, think about a classic car loan as an alternative from the outset. As a rule, the interest rates and conditions for private individuals are cheaper in the end.