Chances are, you know of someone who regularly opts to lease their vehicles instead of buying them.
Whether that method would work for you is entirely dependent on your circumstances. Each option offers distinct advantages, and each has been growing in recent years. Last year the U.S. saw its seventh straight year of increases in car and truck purchases and also saw a record 4.4 million units leased, a number four times higher than in 2009.
How does leasing work? In a process similar to financing a vehicle for purchase, you borrow enough to pay for the value of your leased vehicle over the time you’ll be driving it. A down payment may or may not be required. Then your payments are structured so you pay only for the depreciation and interest over the lease interval. When your lease contract expires, you have no equity and simply give the car back instead of taking ownership, unless you wish to pay off the residual value and buy it.
Whether you choose to lease or buy your next vehicle, be sure to go into the transaction with your eyes open. Some facts to know:
New, Now, and Nifty: Facts About Leasing
Bottom line? Overall costs are almost always higher when you lease, but many consumers who can’t afford down payments or higher car payments — and/or wish to drive newer, nicer cars in the short term — prefer leasing. “The financial workings of leasing are so confusing people don’t realize that leasing invariably costs more than an equivalent loan,” advises Consumer Reports. “The extra cost is difficult to calculate. Still, many people can’t afford the higher payments of a typical loan, at least not without putting a substantial amount down.” A look at some of the other pros and cons:
- Leasing allows you to drive a model with the latest, highest-tech features.
- You’ll be subject to the same credit check as you would with a regular car loan.
- The typical lease lasts about three years, the typical interval of a new-car bumper-to-bumper warranty.
- Leasing typically subjects you to higher interest that helps cover the shorter lending period.
- Leases are typically subject to add-on costs, including lease initiation and disposal fees. “Leasing customers need to make themselves familiar with all of the fees involved across the entire duration of the lease, from inception to conclusion,” advises USNews.com. “In many cases, the end of the lease is not as easy or cheap as simply dropping off the keys and walking away.”
- Most lease contracts impose limitations on mileage, wear and tear and vehicle modifications. You’ll be responsible for general maintenance such as oil changes and tire rotations. Failure to follow stipulations could lead to further charges when you turn in the car.
- Certain manufacturers and independent financiers no longer offer leasing, especially for models that incur higher gas mileage, and as such, bring lower trade-in values.
- Early termination of lease contracts can come with costly penalties.
- After leasing a car, you own no vehicle you can trade in on a car purchase; that means further car or lease payments are likely.
- Some advertised offers for leasing resemble offers for buying; make sure you’re aware of the difference.
- Different dealers offer different lease agreements; read the fine print without assuming your next contract will be the same as your last.
Canny, Controlled and Cost-Effective: Facts About Buying
As mentioned, buying a car is considered much more cost-effective than leasing, especially in the long term. That said, you may have to shop around for the best terms if you wish to secure a low down payment (many lenders require 10 to 20 percent down), a workable time frame and low interest rates. A few other points of which to be aware:
- Your interest rates should be far lower than that of a lease contract because you’ll be paying off principal sooner.
- In addition to the primary cost, buying a car often subjects you to multiple add-on costs such as documentation fees, compliance fees, credit insurance fees, etc.
- Owning your car means you’ll be under no restrictions as to mileage, wear and tear and maintenance.
- The market value of your car can fluctuate considerably from the time you buy it to the time you’re done paying for it — in which case you’ve overpaid.
- Long-term loans can be arranged so the payment amounts rival leases; however, that leaves you at risk of owing more than the car is worth at any given time (i.e., becoming “upside-down on your loan”). If your car is destroyed or stolen or you wish to sell it, the value may then be less than your loan balance.
- Since you’ll own your car once it’s paid off, you should be able to look forward to a time when you’re not having to make car payments.
In short, taking time to research the ins and outs of each process is advisable before signing your name on the dotted line.
“When it comes to buying and leasing, there’s no one-size-fits-all answer,” notes USNews.com. “Consumers need to carefully consider all the pros, cons and costs involved and determine which best fits their situation. Look at your budget and be honest about your mileage needs, lifestyle and credit history before you make the leap.”