OK, so let’s say you like the idea of getting a new car every three years. Making perpetual car payments isn’t an issue for you because you write them off as a business expense. And, you like the idea of just walking away from a car when you’re done with it. However, because you tend to drive far more than 15,000 miles per year, you’ll be outside the range for a regular lease.
Does a high mileage lease make sense in that instance?
What’s a High Mileage Lease?
While you may have been unaware of this, you do have the option to purchase more miles than the standard contract allows at the beginning of a lease. One of the main reasons people are unaware of this is high mileage options aren’t really advertised — though they are usually mentioned in the fine print.
While nearly everyone stops and looks when they see an ad touting a $199 monthly payment, it’s a lot harder to get a consumer’s attention with the higher numbers that go along with a high mileage lease.
Why Does This Matter?
Distilled down to its essence, a lease requires you to pay for the depreciation that occurs during the term of your agreement. In other words, all you’re really doing when you lease a car is paying for the depreciation you impose upon that car.
Standard leases assume you’ll fall within the range of drivers who travel between 10,000 and 15,000 miles per year, so standard lease agreements are based upon that assumption. Miles traveled, along with the overall popularity of a car and its reputation for reliability, are the primary factors leasing companies use to determine residual values and establish monthly payments.
The more miles you put on a car, the lower its resale value and the higher your monthly payment. With that understanding, it’s always smarter to write them into the contract at the beginning than it is to pay for them on the way out.
What’s the Upside?
Let’s say you have a three-year lease with a 12,000-mile annual cap, but you actually drive 33,000 miles each year. This means you’ll be on the hook for the cost of 64,000 additional miles at the end of the lease. Most leases impose a $0.25 per mile fee for this, which means you’re going to owe an additional $16,000 — on top of any wear and tear charges — as well as the normal disposition fee.
If you negotiate those extra miles going in, you could reduce that charge to $0.10 or $0.15 per mile, in which case you’d owe considerably less. Furthermore, you’d have the advantage of paying for those extra miles as you went along, rather than being hit with a huge bill at the end of the lease.
The Point of Diminishing Returns
As you might imagine though, that advantage holds only up to a certain point.
After all, the more you add to the lease payment, the closer you’ll get to the payment on a buy. In fact, it’s entirely possible for a high-mileage lease payment to be higher than a purchase payment.
You’ll have to decide whether to lease vs buy at that point. While deliberating, you should also take into consideration the monthly on a buy will go on for 60 months rather than 36, so you’ll still pay less in the long run — but you won’t own the car either.
So, do high mileage leases make sense? Well, now that you know how they work, you can decide what’s best for your situation.