Should I Lease A Car?

Auto Lease Assistant With PaperworkMany people prefer leasing an automobile to buying. In a lease, you rent the vehicle for a specified period, usually three or four years.

The biggest difference between a car loan and lease is this – with a loan, you’re paying to own a car. With a lease, you’re paying to use a car that’s owned by someone else. Seems simple enough, but there’s a lot more to know than just that when deciding which is best for you.

At the end of the lease, you return the vehicle subject to penalties for excessive “wear and tear,” mileage over the specified amount in the contract, and (depending on the lease) the difference between the car’s current market value and the residual value stated in the lease agreement.

Financially, leases are less attractive than financing and far less attractive than paying cash for a vehicle. If you default on the lease, the entire amount of the lease payments becomes due immediately. The formulas to calculate how much you might owe if you default or terminate a lease early are complicated. Consider talking with an attorney before incurring a judgment for thousands of dollars from defaulting on the lease.

Even then, you might have difficulty getting out of your lease. Here’s a true story of a college student we’ll call Tom. Tom leases a practical economy car for $285/month for 39 months. After 27 months, Tom realizes he is several thousand miles over the mileage allowance of 36,000 miles. With sweaty palms, he calculates that if he continues to drive at his current rate, he will owe over $5000 in excess mileage charges by the end of his lease. Even if he parks the car for the next 12 months, he will have to pay $3410 in payments and $1000 in excess mileage charges at the lease end.

Desperately, Tom tries to find someone to assume his lease. Free Car! Just take over payments.

Unfortunately, Tom gets no takers. The cost to drive the car for another year is a hefty $8410 in payments and excess mileage fees. Tom is stuck!

Can’t Tom just buy the car at the end of the lease and avoid the excess mileage fee? True. Unfortunately, the purchase price at the end of the lease is $9000, roughly $4000 more than the market value of the car.

Tom thought he was being smart by leasing. Instead, he wound up paying far more than if he had just bought the car instead of leasing it. Tom would have been better off buying an older car and avoiding the lease payments.

Why You Should Avoid Financing or Leasing

  1. Automobiles DECREASE in value. As a rule, you should only borrow money to invest in something that goes up in value, like your home, a business opportunity or college education.
  2. Leases have stiff penalties for early termination. If you default, the entire amount is due immediately. Financing (leasing) locks you into your vehicle. If you pay cash and buy a lemon, you can sell it. Since most auto loans are higher than the market value of the vehicle, many people are financially unable to sell their car and come up with the additional funds owed, so they are forced to keep lemons.
  3. Financing encourages overspending. By focusing on the amount of the payment instead of the total amount borrowed, it is easy to get yourself deeper in debt than you had initially planned.
  4. Financing and leasing require ongoing payments. If you get into financial difficulties and are laid off, you could lose your transportation at a time you need it most.
  5. Financing or leasing takes money away from more important financial goals. If you bought a less expensive car and paid cash, you could invest the money that would otherwise go to lease/finance payments for other goals, such as college funds or retirement.
  6. Financing reduces negotiating power. If you finance your car at the dealership, you lose the power to negotiate a better price.
  7. Multiple Fees: There are many additional fees when financing a vehicle including administrative fees and credit insurance. These fees can add thousands of dollars to your payments over the course of your loan.
  8. “Hidden” costs. Typical end-of-lease costs include penalties for excessive mileage and penalties for wear and tear. In some leases, you might have to pay an additional amount if the vehicle is worth less at the end of the lease than anticipated.

Whether you choose a loan or a lease, understand that you’ll pay for insurance, taxes, tags and other fees, and most likely a down payment. So, is it better to buy or lease? Take a look at the following table.

Pros and Cons of Buying a Car

Pros Cons
You can choose between a new or used vehicle and sell the car whenever you choose. The mileage, condition, and popularity of your car will determine its final value.
The car is yours when the loan is paid off, and you can use the car as security for another loan. If you don’t make your car payments on time and in full, your lender can repossess the car and resell it.
You may put as many miles on the vehicle as you like and invest as much or as little as you choose in maintenance and repair. If the resale price of the car is lower than the amount you owe on your loan, you could get stuck paying the difference.

Pros and Cons of Leasing a Car

Pros Cons
The vehicle will most likely be new because used-car leases are hard to find. You’ll probably have to pay a penalty if you: break the lease early, exceed annual mileage limits, don’t meet a specific maintenance schedule, or fail to make the required monthly lease payments on time.
When the lease ends, you can return the car, or buy it for a previously determined price (the residual value). You won’t be able to pledge it as security for a loan because you don’t own the vehicle.
Your monthly lease payments will be lower than monthly loan payments on a comparable car. You’ll have to pay for any repairs needed at the end of the lease period to make the car re-sellable.

You’ll probably be able to lease a more expensive vehicle than you could buy because lease payments only have to cover a portion of the car’s entire cost.

A loan may be a good choice if you put a lot of miles on your car every year, aren’t real big on oil changes and other periodic maintenance, and have a steady income. But, a lease may be your better choice if you drive 12,000-15,000 miles a year, pay close attention to vehicle maintenance, and have an income that varies from month-to-month. Your decision should depend on your needs, your finances, and the type of vehicle you can afford.

Remember, once you sign a contract, you must make your payments. Failing to make proper loan or lease payments will have the same results: Your credit record will suffer and you could lose the car.

Compare a Loan Contract to a Lease Contract

Car Loan Contract Car Lease Contract
An installment loan contract with fixed monthly payments for a set period of time (usually 36, 48, or 60 months). Installment lease contract with fixed monthly payments for a set period of time (usually 36 months).
Higher monthly payments because the loan pays for the entire cost of the car. Lower monthly payments because the lease pays only a portion of the cost of the car.
Loan balance must be paid off before the loan can be terminated. Option to walk away when the lease ends

Whatever you decide, make sure you weigh the benefits and disadvantages of the car loan and lease to find out which suits your needs best.