What are some common myths about leasing a car?
Car leasing is often misunderstood primarily because it’s a bit more complicated than buying with a loan. Furthermore, these misunderstandings are frequently propagated through casual conversations among friends and family, and through the Internet via forums, answer boards, and “expert” advice web sites.
Let’s take a look at the most common of the myths about car leasing:
1. Leasing is like renting, which means no down payment, no credit requirements, can swap cars anytime, can end the lease at any time. Not true. Car leasing is a form of financing, more like a loan than a rental. It requires a good credit score, often a better score than would be required for a similar loan. It’s a legal contract for a specific vehicle for a specific length of time, with 24 months being the minimum. This means it’s not possible to swap cars or end a lease early without heavy cost.
2. Leasing is a way to drive a car when you have no credit, or have poor credit. Not true. See answer #1. Leasing actually requires better credit than an auto loan because there’s more risk to the lease finance company.
3. Leasing has tax benefits. Not true, unless the vehicle is used for business purposes. If used for business, the cost of leasing can be used as a tax deduction just like any other business-related expense.
4. Leasing is a waste of money. Not true. Leasing is no more a waste than buying a car with a loan and selling or trading it 3-4 years later. In both cases the money that is lost is the value depreciation that any vehicle suffers, whether it’s leased or purchased. Leasing pays only for the depreciation.
5. You pay more fees when leasing than when buying. Partially true. Certain fees such as dealer doc fees, destination fees, environmental fees, official tag, registration, and title fees are all common to both buying or leasing. However there are some fees unique to leasing. Examples are an acquisition fee (usually about $595) and a disposition fee (about $350) charged at lease-end when a vehicle is returned. Additional fees can be charged for exceeding mileage limits or excessive wear-and-tear, but only if a vehicle is returned, not purchased at lease-end.
6. You’ll be charged for the smallest of dents and scratches when you return a leased car. Not true, usually. Most lease contracts from major car companies are very specific about what damages will be charged for, and those are typically very lenient. It is inevitable that some minor wear and tear will occur during a lease, and lease finance companies recognize and accept that fact.
7. Lease companies pay for maintenance and insurance for leased vehicles. Not true. When you lease a car, you pay for all maintenance, repairs, gas, and insurance, the same as if you owned the car. Of course, since leased vehicles are all brand new, manufacturer’s warranties and lemon laws offer protection from major repairs. Some car companies, such as BMW and Toyota, even provide for free maintenance for a specified time.
8. I can’t take my leased vehicle if I move to a new town in a new state. Not true. However, when you move, you must notify your lease company not only so that they know where to send your bills, but also the sales tax that is included in your monthly payments (in most states) may have to be adjusted, up or down, due to differences in tax rates between your old residence and your new one. It is true, however, that you can’t take your leased vehicle to another country.
9. Leasing is just another scheme by car dealers to make more money. Not true. Equipment and vehicle leasing had been around long before car dealers discovered it. Since leasing is little more complicated, dealers can often make more money because many customers don’t know how it works or how to get a good fair deal. Since price is the most important factor that can be negotiated in either a purchase or lease, it’s no more difficult to get a good lease deal than a purchase deal.
10. It’s impossible to get out of a car lease early. Not true. However, the cost of an early lease termination can be higher than expected, especially if done within the first half of a lease term. The reason for the higher cost is that the low monthly payments don’t pay down the lease balance quickly. Therefore the amount remaining of the balance is still high during the early months of a lease. The cost goes down as the end of the lease approaches.
11. A car lease doesn’t show up on credit reports as a debt. Not true. Leasing is not renting; it’s a form of financing similar to a loan. Therefore it shows up as an outstanding debt on credit bureau reports, similar to other debts. It might not appear as a lease at all but more like a loan, depending on the lease company that is reporting it.
12. Leasing actually costs more than buying with a loan. Not true. Comparing the 2-4 year cost of a lease versus the cost of purchasing a vehicle with a loan, a lease costs about half as much. However, it is true that the long-term cost of leasing a new car every 2-4 years is higher than the cost of buying a single vehicle and driving it for several more years after its loan has been paid off.