Leasing a car appeals to many people. The ability to change cars every few years sounds exciting and, to some, it becomes a status symbol of sorts. After all, it basically enables you to have a nearly new car in the garage or driveway all of the time. Does it make long-term financial sense, though?
Pros of Leasing
The first pro is the ability to have a lower monthly payment. Many lease offers show a monthly payment that is significantly lower than your payment would be if you purchased the vehicle. What’s more, used car prices have remained quite high across the country, largely due to supply issues as people hang on to their used vehicles for longer, and that means leased vehicles have higher “residual values.” This, of course, results in lower lease payments, because when you lease a vehicle, you in effect pay for the depreciation during the time you drive it. If it depreciates at a slower rate, then you pay less.
You will get a new car every two or three years depending on the plan you choose. That means your vehicle will be unlikely to have any major maintenance issues, and any issues that do creep up should be covered under the warranty. Additionally, cars seem to become ever more fuel-efficient year after year, so chances are you’ll have enjoy better mileage than you would from an older vehicle.
You avoid being upside down on a loan. You may have no ownership of the vehicle, but that means you won’t have negative equity either–a BIG risk with depreciating assets like cars and trucks.
Cons of Leasing
Yes, you will have a lower payment, but you will never own the asset that you are paying on. Well, that’s not entirely true. You could choose to buy the vehicle “off-lease,” for an amount determined in your contract, but this is rarely any more affordable than purchasing the vehicle outright, and it’s often more expensive.
You must have excellent credit to qualify for a lease under the terms advertised. In most cases, you will need to have a credit score that is in excess of 760 to qualify for a lease. That’s why, when you see lease deals on TV, they always mention “with approved credit” (WAC) or “on approved credit” (OAC). You might find that, due to your credit, your lease payments are much higher than advertised.
All leases require a large down payment. You must offer a down payment of at least $2,000 plus all taxes and any fees imposed by your state. That can add up to quite a chunk of change, and it is often known as a “Cap Cost Reduction” in leasing terms.
Contrary to popular belief, you are charged interest on a lease. Of course, in order to hoodwink consumers to some degree, this is known in leasing parlance as the “Lease Factor” or “Money Factor.” And get this: it’s always a small decimal, which you have to multiply by 2400 to get the actual interest rate (see Key #2 here for more information). Sneaky, huh?
You will be limited to a set number of miles that you can drive. The average lease is limited to 10,000 miles per year. Exceed that number and you may have to pay 50 cents for every mile that you are over when the lease ends.
The last issue is what happens when the lease ends? Do you buy the car, lease another one, buy a different car? This is really an issue if your credit has suffered or you do not have a down payment after paying for excess mileage.
While I would not go so far as to say that it is dumb to lease a car, I think that it does not make sound financial sense for anyone concerned with frugality, wealth-building, and sound money management.