Like all car financing options, leasing a car comes with its own set of pros and cons. Usually, it is cheaper (initially) to lease compared to purchasing a car through financing. However, payment is not the only thing to consider when looking into leasing a new car. How long you plan to keep the car, how far you plan to drive it, and how good you are at mitigating wear and tear must all be factored in.
Is leasing a car a good idea?
If you're wondering if you should lease a car, you’ll need to consider your personal goals, needs and finances.
Leases typically have shorter durations than purchase financing and appeal to people who value the latest tech and innovation and/or want to reduce maintenance and repair expenses. Tech and innovation are constantly evolving, which means every few years you will have the option to upgrade your vehicle to the latest model or choose something else entirely. If you weren't a fan of the pick-up truck, now's your chance to try the sedan. The relatively short terms on leases can also give growing families an opportunity to acquire a larger, more accommodating vehicle.
Usually, the down payment to secure a lease is lower than the down payment needed to finance a purchase of the same vehicle. Some leases may require no down payment at all. You should, however, still account for taxes and fees that can add to the upfront cost.
Also, you will need to keep an eye on the odometer throughout the duration of the lease. Many leases limit drivers between 10,000 to 15,000 miles a year (may have options to purchase additional mileage upfront at a lower cost). Driving in excess of the mileage allowance will likely incur additional fees. According to the U.S Department of Transportation, the average American drives 13,476 miles a year. You want to consider your driving habits and anticipated changes over the lease term to decide whether the limits are suitable to your lifestyle.
If you decide to lease, your payments may be lower than the payments for financing the purchase of the same car. Instead of covering the interest and principal, as is the case with financing, your monthly payments cover the car's depreciation, which is the value your car loses while it is in your possession, along with rent and other charges. Unlike a home, which appreciates over time, a car's value decreases after leaving the lot and generally continues to do so over time. Since you do not own the leased vehicle, you do not assume the risk of it being worth less than the anticipated residual value at the end of the lease term (closed-end leases only).
When you purchase a car through financing, you own the car. You can generally remodel or customize it as you please and drive it without worrying about going over set mileage limitations. Later, you can trade it in to a dealership or hand it down to your kids. Buying a car offers you some freedoms and flexibility that leasing does not. In the end, it's up to you to decide which method you prefer.
Below, we've compiled a list of the pros and cons of leasing a car to help you weigh your options.
Pros of leasing a car
Here are some of the benefits of leasing.
- Upgrade often: Leasing a car lets you upgrade your vehicle every two to four years. The average lease is 36 months (three years). If driving a new vehicle is important to you, leasing is a good option.
- Lower payments: All things being equal, the monthly payment on your leased vehicle will generally be less than the monthly payment of a vehicle purchased with financing. This goes for the down payment as well.
- Maintenance and repair coverage: Many new leased vehicles are covered under the warranty by the manufacturer for the entire duration of the lease. Under this coverage, the manufacturer or dealer may perform covered repairs, free of charge (will not cover damage due to an accident). Your lease may cover all maintenance issues, though, some may limit you to things like free oil changes. On the other hand, if you purchase the vehicle, you are responsible for all maintenance costs and all repair costs when the warranty coverage expires.
- GAP Insurance may be included: Many leasing companies include GAP coverage. GAP coverage typically covers you in the instance your comprehensive or collision insurance does not cover the full pay-off value of your leased vehicle should it be totaled. It’s important to verify this coverage with your leasing company. GAP coverage may not be included if you finance your vehicle for purchase and maybe available to purchase separately.
- Buyout option: Leases typically include the option to purchase the car after the end of the lease. If your lease includes this option, and if you find yourself attached to the vehicle after the end of your contract or the vehicle is worth more than the purchase option price, buying the car may be an option.
Cons of leasing a car
That said, there are some drawbacks to leasing a car. Here are a few aspects to consider.
- Limit on miles: There's a limit on how far you can drive leased vehicles before getting hit with fees. It usually ranges between 10,000 and 15,000 miles. The fee for going over your mileage limit can range between $0.10-$0.50 for every extra mile. So for example, exceeding your limit by 100 miles could cost you as much as $50, and many lease agreements do not credit you for unused miles. When you purchase your own car, you can drive it without mileage limitations (high mileage depreciates your car’s value regardless of whether you lease or buy).
- You can't build equity: Just like buying a home, buying a car gives you control over your new asset, which can benefit you either through continued use, as a trade-in, or as an asset to sell for cash. You have no ownership in a leased vehicle unless you exercise the purchase option.
- Excess wear and use could cost you: When you lease a car, you may be required to pay extra for excess wear and use on the vehicle. Standard wear and use are expected, but anything deemed excessive may require repairs or result in fees. Excess wear and use may also further reduce the market value of the vehicle, which may be a consideration if you decide to purchase it.
Similar to renting a home, leasing a car can be an affordable short-term option, especially appealing to those who value driving new vehicles and want the security of warranty and maintenance coverage. However, if the practice is continued over time, it may prove more costly than simply buying a new or certified pre-owned vehicle.