Who leases cars? Why do they lease?
Three types of people who lease cars, and their reasons for leasing instead of buying
There are three primary reasons for leasing a car, and three types of people who do it.
1. People who have plenty of cash to buy a car but want to preserve it for other purposes
These are generally well-to-do people who are finance-savvy and money smart. They prefer not to tie up cash in rapidly depreciating assets (e.g., automobiles) when they can otherwise use the money for smarter, more productive purposes.
These people choose to lease to spread out their cash out-flow. They may also be people who like having a new car every three years or so and prefer to lease rather than buy and not go through the hassles of selling or trading a used car every time. They would rather lease, return the car at lease-end, and begin another lease — simple and easy. Working to sell a used car or haggling with a dealer over a used trade-in is considered a waste of valuable time.
Some may choose to do a one-pay lease (a lease in which all payments are pre-paid in a lump sum up front) to save some money and avoid having to make monthly payments. See Pre-Paid Car Lease for more details.
Sometimes these people have businesses through which they can lease and gain tax or accounting benefits. The tax deduction depends on the percentage of actual business use of the vehicle.
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2. People who are not necessarily cash-poor but like the benefits of leasing
These people like driving new cars, drive only an average number of miles, take good care of their vehicles, but want to budget their monthly expenses. Leasing is a good option for these people.
It also allows them to drive a better car than they might be able to afford with a conventional car loan. A luxury car can often be leased at the same or lower monthly payment than a loan payment for a less expensive non-luxury car. In most states, they save on sales tax when leasing.
Most leases come with GAP insurance, while loans do not. This covers any difference in insurance payoff and lease balance in case the car is totaled in an accident, or stolen.
They, too, like the fact that they don’t have to deal with used car issues later — and that they have an option to purchase their car at lease-end if they choose. Leasing provides them convenience and options.
3. People who are cash-poor and need the lowest-cost method of acquiring a new car
These people are attracted to leasing for the simple reason that it offers much lower monthly payments than would a conventional car loan, often with no money down.
Although this is a perfectly good reason to lease, many people who do it make a mistake in choosing to lease because they 1) don’t understand how car leasing works, 2) drive too many miles per year, 3) don’t take good care of their vehicles, and/or 4) will want to terminate their lease early.
Before they decide to lease, these people need to understand car leasing and how it works (see our Lease Guide for details). Leasing is more complicated than buying with a loan, which makes it easier to make mistakes, pay too much, or be cheated. Low lease payments don’t necessarily make a good lease deal.
This group of people should drive only an average number of miles per year — about 10,000 – 12,000 miles or less. If they drive more miles they can pay for those miles at lease-end, or “buy” the extra miles at the time they lease. Leasing doesn’t make sense for someone who drives more than 20,000 miles a year, even with up-front purchased miles.
They should take good care of their vehicles, perform regular oil changes and maintenance, repair dents and other damage, and replace tires when needed. Otherwise, the lease company charges penalties for anything other than minor dents and dings, unrepaired accident damage, damaged interior, modifications to the car, or worn tires.
These people also should not be in a life situation that might force them to need to terminate their lease before its normal expiration date. This might include a pending divorce, job loss, or other change in financial status. Terminating a lease is not like returning a rental car and walking away. It’s much more complicated and can easily end up costing thousands of dollars.
Summary
There are essentially three types of people who choose to lease their automobiles, instead of purchasing. There are those who do it primarily for the financial benefit, but others do it for other benefits.
Leasing a car is great for some people, not so good for others. Anyone considering leasing should understand how leases work and make sure they are leasing for the right reasons. Otherwise, leasing would be a big mistake.