Is Leasing a Car a Smart Idea?

Understand the terms of the lease before signing on the dotted line

By Edward Pacheco

Are you thinking about leasing that new off-roader of family sedan that you’ve been eyeing lately? Is leasing better as opposed to buying? Oftentimes, leasing seems like the better idea because the payments are lower. However, there are some questions that you need to ask yourself before entering into this kind of agreement. For many people these days, buying a new car that meets all their requirements can be very expensive. It can be beyond the amount of money that the family can spend. On the other hand, leasing that new car can be a cost effective way to ensure that the family gets the car that they need without having to buy a second car as soon as it’s outgrown. Just like everything else, there are advantages and disadvantages to leasing a new car. By taking the time to understand how a lease works as well as how the terms of the lease fit into your lifestyle, you will be guaranteeing that you are getting the best possible deal for the money that you have available to spend.

Just like with buying, it is recommended that you take your time, get a few new car quotes, compare them and then make an educated decision. Because leasing can sometimes involve little or no down payment (though more rare nowadays), you will begin to realize the savings the day you sign the paperwork. A down payment for a loan on a new car can be quite expensive if you want low monthly payments. By leasing you will be avoiding this expenditure while gaining access to the vehicle that is ideal for you.  See: Automotive.com free new car loan calculator

The main advantage of leasing versus buying is that you will have less total cash tied up in the car itself. We know that the down payment and monthly payments will be lower. However, did you know that you will also be protecting yourself against a potential upside-down situation? The moment you drive off of the car lot in a new car the vehicle depreciates in value, and if you put zero-down, you’re technically already upside down. Because of this, if you need to sell the car in a hurry you may not be able to get all of your money back out of it. Think of it this way, you pay $20,000 for a new Honda Civic and put nothing down. Say need to sell it six months down the road. Well, in six months the car may only be worth $15,000 while you still owe $19,000 on it. There is a $4,000 difference that you will be responsible for if you have to sell.  When leasing a new car this never happens, though you are locked-in for the lease and will have to pay an early penalty if you must back-out. Since a lease payment is mostly paying for the vehicle’s depreciation, you are protecting yourself from negative equity when you lease as opposed to buy.

One of the big disadvantages to leasing a car however is that if you decide that you need to terminate the lease early you will be stuck paying quite a large early termination fee. The termination fee for most leases is the difference between the unpaid depreciation and the auction value of the vehicle. So, make sure that if you do decide to lease that new Toyota SUV for example you can actually afford the payments. Not being able to afford the car that you lease will leave you in a very tight spot with a very tough condition—one hand, you can continue to pay the monthly payments that you can barely afford and on the other hand if you terminate the lease you will get stuck with a the bill. Knowing exactly what you can afford is as important with leasing as it is with buying. Also, knowing how many miles you will drive is a must. Unexpectedly going over your mileage limit of the lease terms will give you a hefty hit. Either way, at the end of the day when you sign the paperwork for either a lease or a purchase, you will be entering into a long term agreement that typically involves some pretty high dollar amounts.

To summarize, when you lease you pay for the “use” of the car, but when you buy you pay for the “purchase” of the car. In general, for the short-term (several years), leasing is a cheaper than buying. However for the long-term (10 years) buying is usually the better deal. All else being equal (same vehicle with same total value, same length, and same down payment) the monthly payments you will pay for the lease should be lower than purchase payments. This is still true even when compared to 0% or low-interest loans. If you enjoy having the latest car and not have to worry about maintenance and drive a predictable amount of miles each year a lease may be great for you. If however you don’t mind higher monthly payments, expect to keep the car for a while, drive more miles than most, like to customize your cars or want to build up equity, than buying may be a better option for you.

Note: This is a guest post by Edward Pacheco, an auto enthusiast who shares his knowledge about new cars, financing, and auto leasing at Automotive.com.