You’ve probably heard more than once that car leasing is a bad deal. And in many cases, it definitely makes more sense to buy a car outright. But this doesn’t mean leasing a car is a bad move for everyone. Like any issue, there are pros and cons to leasing a car.
Around 20% of all new car transactions are leases, so it’s clear that there are definitely people out there who love the thought of always driving around in a new car.
But what’s the best decision for you? Well, whether or not to lease a car depends on a lot of factors including how much money you have (both up front, as well as for a monthly payment), how much you drive, and how much time you want to spend on your car.
Let’s take a look at the pros and cons of leasing so you can make the best decision for your situation and circumstances.
Pros of Leasing a Car
- New car, all the time. Leasing a car means you always get to drive around in a sweet new ride. For many people, this is an emotional boost that can’t be ignored. If you love cars and driving, this is a big perk.
- Less maintenance issues. Because you’re always driving a newer car, you usually don’t have to deal with the regular maintenance issues that car owners face as their vehicles age. You turn in your car before all those problems start showing up (e.g. bad brakes or shot transmission). If you lead a very busy life, or you’re on the road a lot, this is one less stress you have to deal with.
- Leases are tax deductible for small businesses. If you’re self-employed or you own a business, you can write off your lease as a business expense.
- “Afford” a nicer car. If you’ve ever wondered how it is that so many people can afford to drive BMWs and Range Rovers, then wonder no more. According to LeaseGuide.com, around 75% of all luxury cars are leased. The reason is because banks don’t like to loan out more than $30,000 for a car loan. If you want a car that’s worth more than that and you don’t have the money to make up the difference, leasing is your only option. On the upside, your monthly payment will be lower than if you actually bought a car. Leasing allows you to “afford” a nicer car than you’d get if you had to buy it.
- Few upfront costs. Speaking of costs, leasing allows you to get into a car with very few “upfront” costs. You often don’t need a down payment (or if you do, it’s fairly low), your monthly payments are lower, and your sales tax is going to be a lot lower since you only have to pay tax on the value of the car you actually used. According to Edmunds.com, this means that during the life of your lease, you’re going to pay roughly half the sales tax you would if you bought the car.
Cons of Leasing a Car
- Lease contract amount doesn’t change, even after an accident. If you get into a car accident and the vehicle is totaled, you’ll still be responsible to pay back the full lease contract amount. Even if the insurance company gives you back less than what you owe to the dealership, you’ll be responsible for the full amount. If you do go with a lease, at least be smart enough to buy gap insurance which covers you for that difference that you would owe to the dealership.
- Limits on time and distance. Many times, the lease agreement will be for 5 years/60,000 miles. So, if you go over that 60,000 miles and keep it until the 5 years is up, you’ll pay a penalty for every mile over 60,000. Think about how many miles you put on a car each year. Most people use well over 12,000 per year. Leasing a car means you have to really “budget” your miles, which can add stress and frustration to your life. Of course, you can negotiate your mileage, and you should, but budgeting miles is a major drawback for many people. On the flip side, if you do a good job budgeting your miles, and stay under your yearly allotment, you don’t get any credit for the miles you didn’t put on the car.
- Liability for payments. If you lose a job or experience a heavy time of financial hardship and cannot afford the payment anymore, the dealership will recover the car and sell it on auction. If they sell it for less than you owe for the lease agreement, you will be legally responsible to pay the difference.
- No ownership, but still responsible for repairs. Leasing a car means it’s not yours; any repairs that aren’t covered by the warranty are your responsibility. But when you turn in the car, you don’t benefit from the investment you made into that car. Leasing a car also means that you can’t modify it like you’d be able to if you’d bought it (e.g. adding a custom paint job or spoiler). And if your kids spill paint on the backseat, or your dog nibbles a bit of the upholstery, you’re going to have to pay extra for “wear and tear” when you turn the car in. Not fun.
- Can’t claim vehicle as an asset. Again, you can’t claim the car as an asset. It is technically still an asset of the dealership that leased it to you.
- Steep car payments and opportunity cost. A lease starts a trend of perpetually paying a car payment. If you never paid a car payment and the average car payment in the U.S. was $350 a month, putting that $350 a month in a mutual fund that made 10% would become $791,171 in 30 years.
- More expensive to buy after lease. If you decide to take the option to buy the car at the end of the lease term, you’ll have paid much more than the cost of the car even if you had financed it.
- Stuck in lease after signing. Another common complaint with leasing is that once you sign a contract, you’re “stuck” in that lease until your term expires. However, sites like Swapalease and LeaseTrader allow you to “sublet” your lease to someone else, just like you’d do with an apartment.
Most of the time, wealthy people pour money into assets and investments that go up in value, not down like cars do. Warren Buffet, for example, drives around a used pick-up truck during much of his personal time. He has lived in the same house that he bought about 30 years ago. He’s wealthy because he knows that possessions are a horrible investment and they rarely buy the happiness that they promise. Similarly, leasing a car doesn’t build any kind of financial value.
On the other hand, to some people, their car is an important part of their life. They love the feel of driving around a new car, and they love not having to worry about maintaining an older vehicle. Sure, leasing a car is akin to renting a house; you’re paying money out each month, none of which builds equity for you. But this might not be as important as the feeling you get every day from a new car. And that’s fine too. Sometimes, the joy of leasing a new car every few years is worth the extra expense.
Whether you buy or lease a car is a highly personal decision. Like every issue, there are pros and cons. So, think about your passion, your finances, and your personal situation carefully before making a final decision.
What are your thoughts on leasing a car?