What are the pros and cons of leasing a car?
Car leasing can offer advantages and be an attractive alternative to buying, although it’s not for everyone, as we’ll discuss in the article that follows this one. You must decide about the importance and priority of these benefits to you.
So, let’s take a look at the potential pros and cons of leasing a car.
What are the Advantages of Leasing?
- Lower Monthly Payments Because you only pay for the portion of the value of the car or truck that you actually use, your monthly lease payments are 30%-60% lower than for a purchase loan for the same car and same term. You don’t pay extra money each month to “invest” in ownership equity.
- No Down Payment Car leasing provides the option of making no down payment, although you must still make the first month’s payment and official tag and registration fees. Some promotional lease deals require a down payment to get the deal.
- More Car, More Often Since monthly lease payments are lower than with buying, you get more car for your money and drive a new vehicle every two to four years. A luxury vehicle can often be leased for the same or lower payments than loan payments for a less expensive economy vehicle.
- Fewer Maintenance Headaches Most people like to lease for a term that coincides with the length of the manufacturer’s warranty coverage so that if something goes wrong with the car, the repairs are always covered. Some car companies also offer free routine scheduled maintenance for the term of the lease.
- Lower Up-front Cash Outlay Most car leases require little or no down payment, which makes getting into a new car more affordable and frees up your cash for other things. However, you can choose to make a down payment, or trade in your old vehicle, to lower your monthly payment amount. Preservation of cash is a strong incentive to lease.
- Lower Tax Bite In most states of the U.S. and in Canada, you don’t pay sales tax on the entire value of a leased vehicle as you would if you purchased. You’re only taxed on the portion of the value that you use during your lease. The tax is spread out and paid along with your monthly lease payment instead of being paid all at once.
- No Used-Car Hassles With leasing, the headaches of selling a used car are eliminated. When your lease ends, you simply turn it back to the leasing company and walk away, unless you decide to buy it or trade it.
- GAP Coverage Included Most car leases automatically include free “gap” protection in case your vehicle is totaled in an accident or stolen, which pays off your vehicle when insurance doesn’t cover the full loss. Loans do not generally come with automatic GAP protection and must be purchased separately.
How About Disadvantages?
Possible disadvantages of car leasing are the following:
- Early Termination Cost If you must terminate your lease before the end of your contract, the cost is usually very high, much higher than might be expected. However, that cost can be minimized by making the right termination choices. See the Early Termination Guide in our Lease Kit. Most people end their lease on schedule and do not end early, which avoids all early termination costs.
- Little or No Ownership Equity The trade-off for low monthly lease payments is that you typically do not build ownership or trade-in value in your leased vehicle. However, it is fairly common that the market value of a vehicle at lease-end is higher than the purchase option price specified in the lease contract — which means you may have equity value to use in a trade or purchase and resale. It’s not unusual to end up with a few thousand dollars of unexpected equity.
- Excessive Mileage Charges If you exceed the mileage allowance in your lease contract, you will be charged for the extra miles at a specified per-mile rate, usually a reasonable $0.20 per mile. A large mileage excess could result in a hefty charge, even at a reasonable per-mile rate. You can reduce your exposure if you “buy” the extra miles you expect to drive at the time of lease signing. You avoid the higher end-of-lease charge this way. If you choose this option, you will usually be refunded for any unused miles.
- Excessive Wear-and-Tear Charges If you return a leased vehicle at lease-end with excessive dents, scratches, or unrepaired accident damage, you will be charged — because those damages reduce the vehicle’s value. Most lease companies clearly specify what is considered “excessive” so that you’ll know if you should get it repaired before returning your vehicle. Lease companies normally don’t charge for minor scratches, dents, or stains. Get any required repairs done yourself before you return the vehicle and avoid being charged.
- Possible Higher Insurance Cost Since new-car leasing and loan companies typically require full-coverage insurance, your insurance might cost you more than you would normally have on your other vehicles, especially if you normally carry only state-required liability insurance. However, insurance cost can be minimized by shopping for the best leased-vehicle rates at different companies. Get your free auto insurance quote from Esurance in minutes & start saving today!
- Higher Credit Requirement Leasing normally requires a higher credit score than buying with a loan. For those with marginal credit, a large down payment or security deposit may allow you to be approved. If you don’t know your credit score, you should. Get your Experian Credit Report FREE at freecreditreport.com
Leverage the Primary Advantage of Leasing
The primary advantage of leasing is the financial savings achieved by little or no initial cash outlay and lower monthly payments. For those people who don’t need the savings for paying the mortgage and other bills, using the money for investments can make leasing even more attractive and multiply the financial benefits.
Although leasing offers attractive benefits to automotive consumers, those benefits should be weighed against any potential disadvantages. There are pros and cons to be examined before making a decision.
Furthermore, there are financial differences between buying and leasing that should be considered. See our exclusive Lease vs Buy Calculator for more details.
It is not our purpose here to convince you that leasing is good for everyone under all situations, but rather to give you the information you need to make your own decision.
Please read the next topic, Who Should Lease?