Is Car Leasing Stupid? Why Not Lease?
Put another way, is it smart to lease a car?
We frequently hear people saying that it is stupid to lease car — that it’s smart to avoid leasing. We’ve even heard some so-called financial “experts” say similar things. Problem is, the advice is based on misconceptions and lack of real understanding of leasing.
Some of the reasons given for advising against leasing
- You return your car at lease-end and have nothing to show for your money
- The lease company will bill you for scratches and dents when you return the car
- When you lease car after car, you are always making payments and never get a break
- If you go over your mileage allowance, you get billed by the lease company for the extra miles
- There are fees and charges in leasing that you don’t pay when you buy
- “Breaking” a lease early is very expensive
- You can’t make changes to the car or customize it
- Insurance can cost more for a leased car
- Leasing is good for business use of a vehicle
Well, guess what? They are mostly right! But …
They are correct in the points being made, but those points are simply facts about leasing and are not necessarily reasons not to lease. People who lease regularly and understand how leasing works, know these facts and are willing to make the tradeoff in exchange for the benefits that leasing offers them, not the least of which is significantly lower monthly payments when compared to buying with a car loan.
Over the typical term of a lease, 3 years, a lease will only cost about half that of a 3-year car loan, including tax savings.
Admittedly, many people who lease are attracted by the low payments but don’t understand how leasing works, don’t understand the restrictions, and should not have leased — and have had a bad experience as a result. Those for whom leasing is successful understand exactly how leasing works, and are okay with the restrictions — in exchange for the benefits and convenience that leasing provides them.
Since many automotive consumers don’t really understand leasing or how to determine if leasing is right for them, it’s prudent for amateur advisors and professional “experts” to simply advise their listeners not to lease at all. That way, if nobody leases, nobody gets in trouble leasing. Pretty safe advice. Kind of like advising, “Don’t eat food and you’ll never get food poisoning.”
What about those points made? Are they right or not?
Let’s address the points now, one by one:
1. Nothing to show for your money – Right. You make monthly payments that are about 50% of an equivalent loan payment, which means you are not accumulating ownership equity in the vehicle. You’re only paying for a vehicle’s natural value depreciation, which is a loss that all new-car consumers suffer, whether they lease or buy. So it’s a case of either low payments and no equity, or high payments and equity. You can’t expect low payments AND equity too.
2. Get billed for scratches and dents – Right, but only for significant scratches and dents as defined in the lease contract. Minor damages that come from normal use of a vehicle are not billed. Some lease companies, such as Honda Finance for example, are very lenient. This is an unfounded fear of people who have never experienced leasing.
3. Always making payments – True, but those payments are 50% less than loan payments and you get a brand new car every 2-4 years with all the newest technology, styling, and safety equipment. And the car is always covered by manufacturer’s warranty and has Lemon Law protection (in most states). People who buy and trade every 2-4 years have the same “issue.”
4. Billed for extra miles – Yes, but since you drove and benefited from those miles and the miles depreciated the value of the car, it’s your responsibility to pay for it. If you drive significantly more miles than the lease allowed, it means you shouldn’t have leased. You can, however, purchase the car at lease-end and avoid the mileage (and wear-and-tear) charges. You can also purchase extra miles, a less cost, at the beginning of a lease.
5. Extra fees in leasing – True. But the fees are relatively small in comparison to the overall cost of the vehicle. There’s usually an acquisition fee of about $595 (more for luxury cars) and a $350 disposition fee when you return the car. That’s it. You actually save money in sales taxes (in most states).
6. Breaking lease is expensive – That’s right. The low monthly payments of a lease don’t keep up with depreciation of a vehicle’s value. So to get the full benefit of a lease, it must be completed as scheduled. If not, there will be a relatively high balance that must be paid if the lease is ended early. It’s more than a simple “penalty” fee. Unless you have a stable lifestyle and will not want to end your end your lease early, then don’t lease.
7. Can’t make changes to the car – True, sort of. If you make changes that can be reversed before you return your leased car, then it’s not a problem. Or if you know you’ll buy the car at lease-end, not a problem.
8. Insurance can cost more – Maybe. It depends on the lease company’s requirements and what you are used to paying. Lease companies (and loan companies too) usually require a high level of collision and comprehensive coverage, to protect their investment. If you are accustomed to only having state-required minimum liability-only insurance, you’ll certainly pay more when you lease.
9. Best for business use – Partly true. Both businesses and consumers can benefit from leasing, but in different ways. Business leases and consumer leases are very different, and each provides particular benefits for that particular use. Businesses use leasing to conserve cash, gain tax benefits, and simplify accounting. Consumers who lease also conserve cash but are usually more interested in the low monthly cost of leasing and the convenience of non-ownership.
It’s easy to give advice against leasing a car, can call it stupid, but leasing offers real tangible benefits to many people. Almost a third of all new cars are leased. Thousands of automotive consumers lease their family cars year after year, with no problems. These are people who understand how leasing works and that leasing works for them.
It’s true that leasing doesn’t work for everyone, and can create problems, especially for those who have done it but didn’t take the time to learn about it and learn how to determine if it’s right for them. For those not willing to take the time to learn, then yes, leasing is stupid.