The Pros and Cons of Leasing a Car
If you're in the market for a vehicle, leasing instead of buying can seem like an attractive option on the surface: no money down, a no-cost trade in for a newer model every couple years and low monthly payments. However, there are less obvious costs and terms associated with leases that can end up costing more in the long run.
When deciding whether or not leasing is a good option, assess your current financial situation, car needs and wants, and the pros and cons of leasing a car. Here are some of the pros and cons of leasing a car, starting with the pros:
Pros of Leasing a Car
Since the car is usually new or fairly new, you get to drive it during its most trouble-free years. They are often under the manufacturer’s warranty as well, which typically means free oil changes and other routine maintenance. You also get to drive a newer, nicer, higher-priced vehicle for less than what you’d pay each month if you were to finance a purchase of the same vehicle. (For more, see: 4 Ways to Get the Best Deal on a Car Lease.)
When you lease, you don’t have to worry about the car maintaining its value. Automobiles depreciate very quickly. The moment you drive a new car off the lot, it instantly loses 10% of its value. After five years, the cumulative loss in value is around 60%.
If you’re a business owner, a lease could mean significant tax advantages for you as a business expense, such as a tax write off or deduction.
While there may be a termination fee for ending a lease early, it can be less of a headache than selling a car and negotiating the selling price. It could also save you a considerable amount of time.
Cons of Leasing a Car
Remember that when you lease a car you’re borrowing, so you’ll have to return it in excellent condition. Any damage beyond normal wear and tear is your responsibility. If you have little kids or pets and they do a number on the car, expect to pay wear and tear charges.
Leasing usually ends up costing more money in the end than an equivalent loan, even if it’s only because you are driving a rapidly depreciating asset. If you’re always leasing, monthly payments go on forever as opposed to buying a vehicle and driving it until the wheels fall off. You have a loan for a few years but after it’s paid, all you’ll have is car insurance, gas and any required maintenance or repairs. Long term, it is always cheaper to buy a car and keep it as long as you possibly can instead of leasing.
Leasing terms often have mileage limits, typically ranging from 12,000 to 15,000 miles per year. Any excess can result in 10 cents per mile (up to 50 cents per mile). This can add up to hundreds of dollars very quickly if you are not careful.
Even though leasing can be a good option if you’re tight on cash, the credit score requirements can be a bit more strict than buying a car. Most lease programs require a credit score of 700 to 850. For buying, there is a wider range of loans available.
Consider Your Lifestyle
The most important factor when deciding whether or not you want to lease or buy a car is your lifestyle. If you’re living somewhere temporarily for a job and driving less than 12,000 miles in a year, leasing can provide a low-cost, comfortable and reliable solution.
However, if you’re looking for a long-term, low-cost option, then leasing isn’t the best choice. Buying a new car is likely not the best option for you either. A used vehicle that is in good condition, has held its value, is reliable and gets good fuel economy is the most cost effective.
Using a loan to purchase a vehicle may also be an option depending on the interest rate. To qualify for a low interest rate, lenders will look at your credit score. And a low interest rate means you’re freeing up cash flow to pursue other financial goals.
Before deciding whether or not to lease a car assess your current financial situation, car needs and wants and weigh the pros and cons. Don't forget to factor in your lifestyle also. (For more from this author, see: 5 Ways You Can Be More Financially Responsible.)