Choosing whether to lease a new vehicle instead of buying it largely comes down to one’s priorities. For some drivers, getting a new set of wheels is all about dollars and cents. For others, it’s more about forming an emotional connection to the car. Before choosing which road to go down, it’s important to understand the key distinctions.
The Basics of Leasing
When you lease a vehicle, you're basically renting it from the dealer for a certain amount of time—usually for 36 or 48 months. Once your lease period ends, you have the option of returning the vehicle back to the dealer, or you can purchase it at a pre-determined amount, which is defined in your lease contract. That's a lot different from buying a car. Buying it outright means you become the owner after the loan is paid off.
- Lease payments, which are generally lower than if you finance a vehicle, depend on a number of factors including the sale price, residual value, and rent charge.
- Leasing does not give you any ownership rights, meaning you cannot customize or make any modifications to the vehicle.
- Lessees get worry-free maintenance, since manufacturer warranties cover the entire term of the lease.
Lease payments are generally lower than those if you finance your vehicle. Financing generally takes the sale price, interest rate, and length of the loan into account to determine the payments. Lease payments depend on a number of different factors including:
- Sale Price: This is the amount you negotiate with the dealer.
- Length of the Lease: This is the number of months you agree to lease the car.
- Mileage: When you sign your lease, you set a certain amount of miles you will drive the car each year. Most leases come with a minimum 10,000-mile allotment. The monthly lease payment will increase by a small amount if you choose to increase the yearly mileage on the vehicle. You will have to pay the dealer extra cash if you go over the mileage at the end of the lease.
- Residual Value: This is the value of the vehicle at the end of the lease. The manufacturer will take into account a certain percentage that the vehicle will depreciate during the length of the lease. Should you decide to purchase the vehicle once your lease is over, this is the amount you will have to pay.
- Rent Charge: You'll often see this on your contract. This figure, represented as a dollar figure rather than an interest rate, is how much interest you'll pay during the term of your lease.
- Taxes and Fees: Fees such as document fees, acquisition fees, if rolled over into the lease, may also affect your lease price.
Some dealers and manufacturers require a down payment for a lease. The more you put down, the lower your lease payment will be. But keep in mind, it may not make sense to put too much money down onto a vehicle that you'll ultimately be giving back to dealer.
Drawbacks and Advantages of Leasing
The major drawback of leasing is that you don’t acquire any equity in the vehicle. It’s a bit like renting an apartment—you make monthly payments, but have no ownership claim to the property when the lease expires. Consequently, you can’t sell the car a few years later and use the proceeds to help buy your next automobile.
However, there are a number of cases where a lease offers a definite advantage. Its benefits include:
Lower initial payments. If your monthly bill is a major concern, leases offer savings in the short-term. While you might pay a bit more interest, the principal portion of your payment is usually considerably less than that of a loan. As a result, lessees are often able to afford more luxurious cars than they otherwise could.
A new car every few years. For a lot of people, there’s nothing like the feeling of driving away in a brand new ride. If you’re one of them, leasing may be the way to go. When the lease is up in a few years, you can return it and get your next new car.
Worry-free maintenance. Many new cars offer a warranty that lasts at least three years, or 36 months. So when you take out a three-year lease, most repairs you need will probably be covered. Leasing arrangements largely eliminate the possibility of a significant, unforeseen expense.
No resale worries. Are you the type of person who hates to haggle? If so, the idea of selling your used car to a dealership or a private buyer probably has you reaching for the antacids. With a lease, you simply return the car. The only thing you have to worry about is paying any end-of-lease fees, including those for abnormal wear or additional mileage on the vehicle.
Maximizing tax deductions. If you use your car for business purposes, a lease will often afford you more tax write-offs than a loan. That’s because the IRS allows you to deduct both the depreciation and financing costs that are part of each monthly payment. If you’re leasing a luxury automobile, however, the amount you can write off may be limited.
If you’re thinking about the long-term financial impact, leases start to look less attractive. Because you don’t build equity and have to pay certain fees that don’t come with a loan, including an acquisition fee—also called a lease initiation fee—experts say it’s usually cheaper overall to buy a car and hold onto it for as long as possible.
It’s also worth keeping in mind that leases provide less flexibility than buying. Leases also discourage you from customizing your car. The finance company may require that you reverse any modifications prior to returning it, which can be both a pain and an extra expense.
Also be aware that if your car is totaled in an accident before the end of your lease, you may be liable for additional costs not covered by your car insurance unless the lease includes car gap insurance to cover any problems.
The Bottom Line
For drivers who love stepping into a new car every few years, leasing can be an attractive option. Leases generally come with an option to buy at the end, but they make the most financial sense if you’re confident you don’t want to hold onto the automobile long-term.