When you shop for a new car, you have the option of buying or leasing. If you listen to financial experts, leasing gets a bum rap. But while it’s certainly not right for everyone, for some consumers, leasing can make sense.
Leasing vs. Buying
Leasing can be an appealing option over a traditional finance arrangement because the monthly payments are lower, and you are able to afford to drive a shiny new car every three-ish years. You can typically drive a nicer vehicle than you’d otherwise be able to afford, and lease offers may require a small down payment, or no down payment at all.
When you buy a car, your monthly payments are calculated based on the total cost of the car. When you lease, your payments are primarily based on the depreciation in the car’s value over the lease term.
At the end of the lease term, you have two options. You can turn the car in and walk away, or you can buy the car for a predetermined price.
If you’re looking at your new car purely as a financial investment, then leasing is a poor choice. It’s similar to renting an apartment instead of paying a mortgage. When you lease, you pour thousands of dollars into your payments but never build any equity in your vehicle. At the end of the lease, you walk away and have nothing to show for the expense. In contrast, if you financed your new car, once you make your final payment, you own your car free and clear.
To help you determine if leasing is right for you, consider the following questions.
1. Do you drive a lot?
When you lease a car, there are mileage limitations. You are typically restricted to either 10,000 or 12,000 miles per year. If you have a three-year lease with a 12,000 mile per year allowance, there is a penalty for every mile driven beyond 36,000 miles at the end of the lease term. The mileage penalty is usually between $.15 and $.25 per mile, so it can get expensive quickly. Before you sign to lease a new car, make sure your typical driving is well within the contract’s mileage limitations.
2. Do you take good care of your car?
Leasing can make sense if you typically take excellent care of your car. When you turn in your leased vehicle, there can be penalties for dents or scratches. But if you’re a careful driver and typically keep your car looking like new, you don’t need to worry about this penalty at lease end.
3. Do you like to drive a new car every few years anyway?
If you like to drive a new car every few years, leasing can make financial sense over buying. When you buy a new car, you typically make a larger down payment, pay more per month, plus you also take the huge initial hit in depreciation that a new vehicle takes as soon as you drive off the lot. If you trade in your car after a few years to buy something new, odds are you’ll still owe money on it so you better hope you’re not upside down on your loan (click here to read my post on negative equity). Comparing the total cost to drive a car for three years, leasing will cost less than financing that same purchase.
If you rack up the miles, or if you’re hard on your car, or if driving something shiny and new isn’t important, then leasing probably isn’t the right option for you.
Why I Chose Leasing
The year was 2013. I was driving my old Hyundai Sonata which was long since paid off. But the car was getting older, mileage was getting high, and it had developed some issues. Random expensive repair bills kept springing up out of nowhere. It got to the point where it didn’t seem that the money I was putting into the car was doing much to extend the car’s life, so it was time to start shopping around.
It would be an adjustment from owning a car that was paid off to having a monthly payment again. I was on a pretty tight budget, but I could probably afford to either finance a used car, or lease a new one.
Leasing a new car made more sense than financing a used car
I chose to lease a new Toyota Prius. While I was confident in Toyota’s legendary reliability, even if my car had any issues, I was covered by a full warranty for the duration of my lease. Toyota also offers free maintenance for the first two years. Oil changes and tire rotations were free for two of the three year lease term.
If I chose to finance a used car, I might not have had the protection of any warranty at all. Not only would I have a monthly payment again, but I might need to foot the bill for repairs at the same time which I saw as a lose-lose scenario.
My $250 monthly lease payment wouldn’t build any equity in the Prius, but that was a tradeoff I was willing to make. After driving an older car that needed sudden surprise repairs, I viewed my monthly payment on the Prius as a form of insurance. For $250 per month, I was protected from expensive repair bills popping up at the worst possible times. In my budget, it was a lot easier to allocate money for that monthly payment than it would be to figure out how I’d pay for a repair bill that I wasn’t anticipating. At the time, leasing made financial sense for me.
If you need help talking through your situation to determine if leasing is right for you, please get in touch. I’d love to help. Also, if you know of anyone who might benefit from reading any of my blog posts, please share! I really enjoy putting these posts together, and I want to get them in front of as many eyes as possible.
And stay tuned! I’m putting together a follow-up blog post on leasing. I didn’t want to make this post a full novel, but I have more advice to share. While I’m still working on it, if you have any lease-related questions, please let me know. I might work them into my follow-up post!
And as always, thank you for reading.
My follow-up posts on leasing are up! Click here:
Leasing a Car, Part 2: Down Payments & Gap Insurance
Here in Part 2, I’ll talk about what determines your lease payment, down payments when leasing, and the always sexy concept of gap insurance.
Leasing a Car, Part 3: Options at Lease End
When leasing, at the end of the term, what do you need to be prepared for if you want to turn in your car? Is buying your leased car a smart financial move?