Leasing a Car: Do the Pros Outweigh the Cons?

(Here's what you need to know)
Considering paperwork for a new car.

Leasing a new car or truck is an attractive option for many motorists. About 20 percent of all drivers lease their vehicles. When it comes to luxury cars, more than half of their drivers choose to lease. However, leasing isn't right for everyone or every car. The vast majority of consumers still choose to buy their car. Which option is right for you? Here's a list of pros and cons for leasing and buying a car that can help you decide what to do.

Just make sure you're covered with an affordable car insurance policy.

Pros of Leasing a Car

One of the biggest "pros" about leasing a car is that it is always under warranty, and you save on big mechanics' bills because newer vehicles break down less often than older ones.

The other principle benefit that lessees enjoy is being able to drive a nicer vehicle than they otherwise would be able to afford had they purchased the car. A monthly payment on a lease agreement is often much lower than a monthly auto loan payment. People who lease their car or truck also do not have to pay those high interest rates and avoid absorbing the depreciation of the value of the car.

If you are a self-employed person or a business owner, you may be able to use the lease as a tax deduction. This is an attractive feature for the businessperson on the go.

Terry Berg, a veteran sales representative for an independent dealer that offers Ford, Dodge, Chrysler, Kia and Jeep models, said leasing has never been better.

"The manufacturers are putting big incentives on leasing right now," Berg said. "By far, the biggest advantage is you're able to drive a brand new car, but with payments as if it were a used vehicle."

Just the other day, Berg leased a $46,000 vehicle to a customer who put $3,000 down; his payments are $314 a month.

"There really isn't a down side to leasing right now," Berg said.

Leasing isn't always the best option, however.

Cons of Leasing a Car

It's important to consider the possible downsides of leasing. Dealerships limit the number of miles you can drive your leased vehicle. They usually restrict your travel to between 9,000 and 15,000 miles each year. If your travels exceed these limits, you will pay a costly fee – generally around 25 cents per extra mile, which can add up quickly.

Leasing a car is just like renting it. It is much like renting an apartment: You aren't able to benefit from the improvements you make, and when your lease is up, you do not keep any of the equity you put into the vehicle.

If you are hard on vehicles, leasing may be a risky option. When you return the car or truck to the dealership at the end of the lease, they inspect it carefully for any wear and tear and charge you accordingly. They also charge you if you altered the vehicle in any significant way.

Pros of Buying a Car

When you buy your car with financing or cash, you do not have any mileage restrictions and you can make any alterations you wish to the vehicle. One benefit that sets buying apart from leasing is that, once the vehicle is paid, you no longer have those monthly payments. 

Lessees pay every month for the term of the lease and then must decide whether to opt for another lease or to purchase their next vehicle, which will require future monthly payments as well. If you plan to drive your car until the wheels fall off, buying is probably the better choice for you.

Cons of Buying a Car

When you purchase a new car, you take the depreciation hit. Car enthusiasts, like diesel mechanic Nathaniel Benoit, joke about the "$5,000 drive out of the dealership parking lot," which describes how quickly a new car loses value. "If you're going to buy, buy used," Benoit advises.

Most dealers require 10 to 20 percent down when you buy a new car or truck. On a $30,000 car, that's $3,000 to $6,000 up front. If you don't have that kind of cash to put down, leasing may be a better option if you still want that nice, new vehicle.

Also, the monthly auto loan payments of consumers who buy their car are often much higher than a lease payment.


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So You've Decided the Pros Outweigh the Cons - How to Lease a Car

If you have read the pros and cons to leasing and buying and have decided that leasing is the better option, there are several things you should know about the process.

Your monthly lease payment is determined by the difference between the vehicle's transaction price (its "capitalized cost") and what it's estimated to be worth at the end of the lease term (the "residual value"). You then finance this difference at a particular rate of interest, usually termed a "lease rate."

The biggest factor that influences your lease payment is your credit. Television commercials featuring attractive lease rates and low down payments target those with pristine credit scores – a fraction of the population. Most people will have to put more money down and pay higher monthly payments than those mentioned in the ads. Lessors will most likely deny the option to lease to those with a poor or insufficient credit history.

Many lease agreements will give you the option to buy the car once the lease is up. You may really like the car, but you will end up paying far more through this process than if you had bought it initially. You can always find the same make, model and year for purchase should you fall in love with a particular vehicle.

Berg said it's important to find out what car you'd like to lease, but don't be afraid to ask the dealer for help.

"Some cars lease better than others," Berg said. "Independent dealers work with multiple manufacturers and can find you which cars or trucks have the best leasing options."

Choose Your Lease Agreement Carefully

It's just as important to compare prices and options for a lease agreement as it is to shop around for the best price to buy a new car. One dealer may require a large down payment while the dealer down the street will wave this cost in order to secure your business.

The final price of a lease agreement is just as flexible as the selling price a dealer may ask for a particular vehicle. Don't be afraid to negotiate the final cost and options on your lease.

Once again, ask yourself, “Should I buy or lease a car.” If you still answered “lease,” then proceed carefully. Be sure to read your lease agreement thoroughly before you sign it. Find out what the early termination fee would be should you choose to end your lease before the determined date. 

This fee could be substantial. Also, take note of any additional charges spelled out in the agreement, including any excess mileage fees; wear and tear charges; and whether the dealer offers gap insurance to cover you in the event someone steals or vandalizes your leased vehicle. 

When it comes to the auto insurance coverage you need, it's strongly recommended that you get advice from a professional like an independent agent. Independent agents can give you unbiased information that can help you save and keep you safe no matter what challenges you face as the lessor.

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