Photo Credit © Shutterstock Images

Want to learn new ways to make extra money?

Join 1,000,000+ monthly readers in getting updates and cool freebies:

Our number one goal at DollarSprout is to help readers improve their financial lives, and we regularly partner with companies that share that same vision. Some of the links in this post may be from our partners. Here’s how we make money.

leasing a carPlenty of US drivers find leasing a car attractive.

In fact, in 2016, 4.5 million drivers leased a new car.

And leasing a car can appear to be a great deal since the monthly cost is usually lower than a loan payment on the same vehicle.

However, there are plenty of hidden costs and risks to leasing that you should consider.

What Does a Lease Entail?

Leasing a car is a way to drive a new car for an agreed-upon monthly payment or fee, but the manufacturer or dealership still owns the vehicle. The monthly fee includes the rent payment, which is the cost of driving the car. It also factors in vehicle depreciation, taxes, and fees.

A lease agreement usually lasts for two to four years, and generally ends with you returning the car to the lessor (the company you are leasing from). Your agreement might include a purchase option, giving you the option to buy the vehicle once your lease ends.

Leasing a car is different from buying. The main difference is that you don’t own the car. Instead, the lessor maintains ownership. You’ll also negotiate different terms when you lease a car. Car buyers negotiate terms like purchase price and financing interest rate. Lessees may negotiate terms like the lease length, monthly payments, or purchase options.

Although it’s possible to get a used-car lease (usually on a certified pre-owned model), most dealerships only offer leases on new cars. You can lease almost any kind of new vehicle – car, truck, SUV, luxury, or economy.

You might wonder if you should lease or buy a car. It’s a tough choice at times but before you decide based solely on price, examine the different costs and risks.

Cons of Leasing a Car

Although leasing a car might seem like less of a commitment than owning one, the fact is that there are risks and hidden costs when you lease. It’s important to be aware of the potential charges up front so you don’t blow your budget on a car lease.

More Expensive than Owning a Car

Leasing a car is more expensive than buying a car. The primary reason is that you make monthly payments like you would for a car loan, but at the end of your lease, you return the car to the lessor.

On the other hand, when you finance a car, you make monthly payments. Then, at the end of the finance term, you own the car. You could then, theoretically, sell the car. With a car loan, you make payments towards something you will actually own. With a lease, you never own the car. You’re just borrowing it.

Monthly payments for a lease might be less than monthly payments for the same car, but keep in mind, your car insurance might cost more. You can use this leasing a car calculator to compare monthly payments and the total cost of leasing vs buying.

Mileage Limits

Most leases come with mileage limits. The company leasing the car wants to limit the car’s depreciation and maintenance while it’s on lease, and, as a result, your lease terms should include a mileage cap. The lease agreement also tells you how much you will pay for each mile over the limit.

Because of mileage limits, leasing isn’t a cost-effective choice if you have a long commute or you like long road trips. You’ll quickly exceed the maximum mileage and end up paying overage fees.

More Expensive Car Insurance

You’ll need more car insurance coverage if you lease a vehicle. Most states require liability coverage and uninsured/underinsured motorist coverage. This is a legal requirement and is the same across financed, leased, and owned cars.

Lease holders usually require additional insurance coverage, like collision and comprehensive coverage. Collision and comprehensive coverage will pay for repairs to your vehicle if you’re in a wreck or your car becomes damaged by something else like theft or vandalism.

If you choose to carry collision and comprehensive on a vehicle you owned or financed, the insurance costs should be about the same for leasing. On the other hand, if you want to save money by buying only the minimum required insurance coverage, your insurance could be more expensive on a leased car.

It’s Expensive to Break a Lease Early

Although leasing a car may seem like a low-commitment option, it’s actually more binding than buying a car. If you finance a car and later need to sell it, it’s easy to do. You can sell the vehicle, pay off the loan, and finish the transaction.

Getting out of a car lease is not so easy. Lease payments cover the car’s depreciation over the life of the lease agreement. If you break the lease early, the vehicle’s owner isn’t receiving full compensation for the car’s depreciation. And since the car is no longer new, they can’t lease it again.

Lessors want to discourage lease-breaking, so your lease agreement usually includes harsh penalties for breaking the lease early. This could add up to thousands of dollars.

You Can’t Change the Car During the Lease

If you find out you’re expecting twins halfway through a car lease on a Mini, it will be very hard to break the lease. On the other hand, you can easily trade your Mini in for a minivan if you had purchased the Mini.

Think about whether you are planning any major changes in your life over the term of the lease. If you’re not sure whether the car you’re considering will work for at least the next two to four years, it probably makes more sense to buy a vehicle.

Pros of Leasing a Car

People who really want to drive a new car or want repair costs covered could benefit from leasing. It still ends up being more expensive in the long run than buying a car, but some people are willing to pay for these conveniences.

No Maintenance Expenses

Repairs are usually covered by the dealer if something goes wrong while you’re leasing the vehicle. This means that you don’t have to budget for surprise vehicle repair expenses, which can get costly. If you don’t have an emergency fund and prefer to know exactly how much you should expect to spend each month on a car, leasing could be more predictable.

Lower Monthly Payments

Lease payments are usually lower than auto loan payments because you’re paying for different things.

When you finance a new car with a loan, your monthly payment includes repayment of the amount of the loan plus interest. On the other hand, a lease payment covers the car’s depreciation, interest, taxes, and fees.

A lease vs buy calculator can show you the difference between buying and leasing a vehicle.

You Don’t Have to Sell Your Car

If you lease a car, you don’t have to deal with the hassle of selling it when your lease ends. When the lease period is over, you return the car to the dealer or manufacturer. That’s it. There’s no worrying about selling it or trading it in to a dealership.

Is it Easier to Get a Lease than a Car Loan

On average, it’s easier to get a car loan than a lease. In 2018, drivers who leased a car had an average credit score of 724. Drivers who secured new car financing at an average credit score of 715. Borrowers who financed used cars had an even lower average score of 659.

If you have bad credit, you might have a tough time getting a lease. Since the lessor still owns the vehicle, they want to make sure that the person driving it is reliable and will make prompt monthly payments.

People with low credit scores should look into other options for buying a car.

How to Get the Best Deal On a Lease

is it better to lease or buy a car

Before you start shopping for cars to lease, research the cars you’re interested in as well as the lease process. Price the car you’re interested in on dealer websites to get a sense of the average sale price. Research car leasing terminology so you’ll understand all of the components that go into your monthly lease payment.

You can also get a better deal on your lease by choosing a car that holds value. You’ll pay less to cover the cost of depreciation if you lease a car that doesn’t depreciate much. According to a study by an automotive research firm, Jeeps depreciate 27.3% on average over a five year period, whereas a BMW 7 series depreciates on average 71.1% over five years.

Car dealerships sometimes offer lease specials around model year end or the holidays. Research dealers and manufacturers to find any leasing deals, and don’t be afraid to negotiate and shop around.

Is it Better to Lease or Buy a Car?

Although it’s tempting to lease a new car for the low payments, leasing doesn’t make sense for most people. When you finance a car purchase, you’ll pay more each month but you’ll own the car at the end of the loan term.

And if you’re wondering how to lease a car with bad credit, you shouldn’t use this option at all. Instead, consider buying a used car, preferably in cash.

When you buy a car rather than leasing one, remember that it’s easier to sell a car you’ve purchased than it is to get out of a lease. That flexibility is important, especially if you expect your financial or life situation to change during the term of the car lease.

Car buyers can also choose between new and used cars. Used cars usually have a much lower price point, and can be very cost-effective. Since most car leases are on new cars, you very rarely have the option of a lower-priced used car when leasing. Since buying a car is both cheaper in the long run and more flexible, buying instead of leasing is a smart financial decision.

If you really need to save on transportation costs, find other ways to do so like getting free or discounted gas or using public transportation. Leasing a car isn’t the only way to get around.

Author

Cat is the go-to personal finance expert for educated, aspirational moms who want to recapture their life passions, earn more, reach their goals, and take on a more active financial role in their families. Cat was named the Best Contributor/Freelancer for Personal Finance in 2014, and over the past few years her writing and financial expertise have been featured in dozens of notable publications like The Wall Street Journal, Yahoo! Finance, U.S. News and World Report, and many more.

Leave your comment

1,469

You May Also Like

7 Types of Insurance That Will Cover Unforeseen Events

Insurance is a necessary part of your financial life, but do you have all the coverage you need? With so many different types of insurance available, you might be overlooking a crucial one putting your financial health at risk.

Amy Beardsley 30 Apr