If you’ve ever gone car shopping, you’ve probably been given the opportunity to lease a car.
On the surface, a car lease seems too good to be true. You get to drive home in a brand new car for a lower monthly payment than if you got a loan to buy the car. Then, in two or three years, you have the option of buying out the lease and keeping the car or trading in for another new car. What’s not to like? Why wouldn’t it be better to lease?
Car leases are the subject of great passion for a number of financial writers. Ask these guys whether it’s better to buy or lease a car, and most will look you straight in the eye and say: “Never ever lease a car!”
Don’t agree? Test out the numbers in our Buy vs. Lease Calculator and see for yourself — all other factors being equal, leasing almost always costs more in the long run.
OK. So what if it’s a little more expensive? Who needs to own a car? It’s a depreciating asset, anyway. What if you just want to drive it, not worry about maintenance or ownership, and just pay for that luxury?
If that’s how you feel, then a lease will certainly be attractive. You must simply realize that:
- Car leases are a luxury and
- You will pay extra for that luxury.
I can recommend leasing to somebody who is debt-free, financially successful, and can afford the luxury. Perhaps that person is savvy enough to know that by investing money she would’ve spent on a car, she may come out ahead when that money earns a good return in the stock market.
On paper, leasing a car and investing the cash you would’ve used to buy makes sense. But this requires you have the discipline to: 1) Actually invest the money, not spend it on something else and 2) Keep the money invested for decades. We humans are rarely so rational.
Over the long run, you will always pay less if you buy a used car and keep it as long as possible.
The only way you can change this calculus in favor of leasing is if you buy brand new cars and trade them in too soon, in which case leasing may save money. Bottom line: New cars are never a good financial move, but if you “have to have” a new car every few years, leasing is the way to go. If you crave a new car every once and a while and want to minimize the financial fallout, try to drive it for 10 years or more.
Let’s look at the other pros and cons of a car lease:
The upside to leasing
Brand New Car
Leasing is about luxury and convenience. You get the luxury of a new car and the convenience of not having to worry about maintenance. That’s not to say you can go two years without an oil change, but because the car is new, you hopefully won’t have to worry about any major repairs, which would be covered by warranty if they were to occur.
Lower Monthly Payment
In most cases, the monthly payments on a lease are less than if you get a loan to buy the car at normal interest rates over three or four years. Keep in mind that most leases do require down payments equivalent to those required to buy.
Less Commitment
Leases make sense if you only need a car for a defined period of time, such as a two-year job assignment. Or, let’s say you need to replace a car now but your family is growing and you know you might need a bigger car in two or three years. A lease can help you bridge that time period.
Business Deductions
Leases can be attractive to business owners because you can deduct a portion of your lease payments based on how much you drive the car for business.
The downside to leasing
You don’t own anything
You never own anything when you lease. Although leasing may seem less expensive over the next two years, in the long run, you’ll always have a monthly payment. Yes, cars depreciate. But if you keep them long enough you’ll still have something of value that you can sell.
You can only drive so far
If you drive a lot, a lease is not for you. Dealers make money on leases because they collect your lease payments and then can resell the car as a two- or three-year-old certified used car. But the more miles on the car when you turn it in, the less a dealer can sell it for. Most car leases will charge something like 12 cents for each mile you drive over a certain limit. Most leases set a cap between 12,000 to 15,000 miles per year.
You’ll need excellent credit
Leases require top-notch credit. Although you can get a car loan even with bad credit, that’s not the case with a lease.
You can’t customize your car
The dealer will charge you for any excessive wear-and-tear on the leased car when you turn it in. That means dents or dings or interior damage from smoking or pets. It also means you can’t customize a leased car.
It’s not easy to to get out of a lease
If you buy a car and six months later lose your job or need a different type of vehicle, you always have the option of selling it. It’s more difficult to get out of a lease. You can’t just end the lease early…at least not without harming your credit.
Negotiating a lease is complicated
Understanding how leases are priced is more complicated than understanding a sale. I didn’t even fully understand them when I worked at a car dealership and I was selling them!
Lease prices depend, in part, on:
- Capitalized cost: Similar to the initial price of the vehicle.
- Term: The length of the lease.
- Mileage allowance: How many miles are included each year.
- Your credit score.
- Money factor: This is the confusing one. The money factor is similar to an interest rate, so the lower, the better. A lease money factor is a very small number such as .00315. Multiply the money factor by 2,400 to get something you can understand as an interest rate. In this example, 7.5%.
- Residual value: The car’s “value” at the end of the lease. A higher residual value can lower your monthly payment, but make it harder to get out of the lease if you need to. A lower residual value means higher monthly payments but a lower buy-out option at the end. While it’s unusual that it would be a good deal to buy the car you leased when your term is up, a lower residual could make it easier to sell the lease or trade-in the lease mid-term.
How to decide
When it doubt, buy, don’t lease, your next car. Keep in mind that according to Cars.com, 80% of people buy their cars. You won’t be alone.
Used cars make the most financial sense, but if you must buy new, you should consider leasing if there’s a good chance you won’t keep the car for five years or more.
There are a few other situations in which leasing might make sense:
- If you’re debt-free, successful, and like the idea of a new car with minimal maintenance and are able and willing to pay for that convenience. In other words, know what you’re getting into. It’s all about conscious spending. If you have the money and spending it on a new car lease makes you happy, go for it.
- If you plan on investing a lump sum of cash that you would’ve spent on the car.
- If you use your car for business and deduct car depreciation as a business expense, leasing may offer a bigger tax break. Consult your tax advisor first.
Before you leave your opinions on the buy or lease debate in the comments (and I hope you do), remember there are always exceptions. Maybe, for example, you only need a car for two years and don’t want to worry about selling it when you’re done. And in some cases, in-demand used cars are worth so much at the end of a lease, lessees actually come out ahead! (Don’t count on it though.)