Dealers seem to be pushing car leases harder than ever. If you’ve never leased a car before, you’re probably wondering if they are worth it. You might be tempted by the lower monthly payments. Or, you might have heard that leasing a car is throwing your money away, and have never given car leases a second thought. And if you’re currently leasing a car, you should ask yourself if it’s really the best option for you. As with many financial options, car leasing may make sense for some people, while being a bad move for others.
Not-So-Cheap Budgeting Tool
The most obvious benefit of car leasing is the lower advertised payments over buying. For the same monthly payment, a car lease will get you into a much nicer car than a financed purchase with the same amount down. Like a car loan, a car lease also acts as a budgeting tool in place of a car savings fund, although an expensive tool in the long run.
If you’ve fallen in love with a new car that would otherwise be out of your price range, its easy to ignore the downsides of leasing. However, 3 months into the lease, after that fancy new car has just become your method of point-A to point-B, the downsides of leasing will still be painfully real.
When you buy a car, you actually own something of value in exchange for your money. It still depreciates and incurs lots of expenses, so don’t think of it as an asset. But at least you will have something of value to put towards your next vehicle. When your lease is finished, on the other hand, you have no equity to show for your payments.
Owning a car outright also allows you flexibility when circumstances change. Car payments may fit comfortably in your budget now, but what if life changes. You might get hit with unexpected bills or expenses, or with a drop in income. Either way, short of cancelling your lease or selling your financed car, those payments won’t go away until the lease or loan term is up. Furthermore, with the car loan, you’ll still get to keep the car when the loan is up. With the lease, you’ll be forced to shell out more if you still want a car- something won’t be easy if your finances are crunched.
Its easy to forget that a leased car isn’t yours when you drive it every day and park it at your house every night. At the end of the day, the dealer owns it and will want it back in good condition. This leaves you on the line for expensive penalties at the end of the lease if the car does have any cosmetic damage. The dealer is also going to require you to put more insurance on the car than you would have been able to get by with if you had owned it outright, leaving you stuck with higher premiums.
Often part of the dealer’s definition of “good condition” is a low odometer reading. Many leases come with a mileage limit. If you know that you put on lots of miles, be on the lookout for these lease conditions.
So Who Should Lease Cars?
With all the downsides of leasing, should anyone lease? For most people, buying should be the obvious choice. However, if you have a rock solid income (think tenured professor, retired with locked in annuity or pension income), and your income is large enough that you don’t mind always having a car payment, and you really don’t want to maintain a car savings account, a car lease could work for you. As long as know that it’ll cost more than buying and holding for a while, and are OK with that, go for it. For everybody else, I’d recommend staying away from a lease.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.