Personal Finance

What millennials need to know about leasing a car

Millennial car buyers are more likely to lease a car than Generation X and the baby boomers. And millennials are leasing more than ever.

Leasing accounted for nearly 29 percent of all new car purchases by millennials in 2015. That beats the average lease penetration rate of 26.7 percent for the entire U.S. population, and is a 46 percent increase in leasing by millennials over the past five years, according to a study by automotive information website Edmunds.

Why is leasing so attractive to millennials? One reason is because you can get a car you might not be able to afford to buy outright.

Most popular cars millennials lease
Most popular cars millennials lease

These are the most popular leased luxury cars by millennials based on volume for January through May of this year, according to automotive market researcher IHS Automotive:

  1. Lexus IS
  2. Mercedes C Class
  3. Infiniti Q50
  4. Lexus RX
  5. BMW 328

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But leasing a car isn't necessarily great for your wallet. The Edmunds study found that there is a "dramatic difference between what millennial shoppers can afford when they choose to lease compared to when they choose to buy." Here's what you need to know about leasing a car so you don't get in over your head.

Decide how much you can afford. Make sure your monthly lease payment to is no more than 20 percent of your net pay, said Tony Zabiegala, a financial advisor at Strategic Wealth Partners in Independence, Ohio. Breaking a lease can be expensive, so you will need to budget and have an accurate estimate of what the lease will cost. "If you can budget, you should have enough wiggle room to satisfy the lease," he said.

Use the auto lease calculators at Bankrate or Edmunds to figure out how your monthly payment fits into a budget.

Don't forget insurance costs and "drive-off" fees when you budget. Go online or talk to an insurance agent to get a coverage quote for the car you want. Insurance is usually higher for leased vehicles than cars purchased with loans.

Plan on about $1,000 in "drive-off" fees, which include an acquisition fee, initial registration and sales tax, said Philip Reed, Edmunds' senior consumer advice editor.

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Figure out how much you drive. The mileage you put on a vehicle will affect the lease costs. A typical auto lease is three years and includes 12,000 miles per year. But if you go over that limit, it'll cost you.

Buy more miles upfront if you think you will go over the cap. You can usually purchase an extension for 5 cents per mile and have it rolled into your monthly lease payment. That's cheaper than the alternative. You typically would be charged 10 to 15 cents for each additional mile if you drive more than the 36,000 miles included in the standard, three-year lease and didn't pay upfront.

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Research prices. Call multiple dealerships and get lease quotes, Reed said. Let each know they are bidding for your business. Ask the dealership for the monthly payment on a three-year lease at 12,000 miles per year, including drive-off fees. "It's a quick way to get quotes and compare quotes and works so much better if you are not physically in the dealership because you have leverage—they have to give a good offer and they can't hold you captive," Reed said.

Negotiate a better deal. Once you have at least three price quotes for a lease, it's time to haggle. "Particularly with leasing, there's a perception that the [manufacturer's suggested retail price] of the car doesn't need to be negotiated in a lease and that is a very incorrect myth," said Eric Lyman, vice president of industry insight at automotive pricing and information website TrueCar. The more you know about lease prices, the more opportunity you have to lower your monthly lease payment.