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Want to pay less every month for a new or newer vehicle without having to worry about depreciation, high interest rates, and other owner headaches? Consider leasing a car, which can save money but doesn’t earn you equity.
Take the time to learn how car leasing works the benefits and disadvantages of leasing, worthy prospects for leasing an auto, types of vehicles worth leasing, and ponder other matters before signing a lease.
How leasing a car works
Many people prefer renting instead of buying a home, which can result in paying less each month, avoiding the risks of ownership, and having the flexibility to move on quickly once your lease has expired. The same can be true of cars: Only instead of renting a vehicle, you can lease a brand new or recent auto and reap similar advantages.
When you lease a car, you enter into a contract with a leasing company – typically offered at a car dealership – often for between two and four years. You pay a fixed monthly fee as well as an upfront cost that commonly equates to between one and 12 monthly payments.
Your monthly fee enables you to keep and drive the vehicle without owning the car at any point during the agreement.
Your lease contract will specify mileage limits, which typically range from 10,000 to 15,000 miles per year. If you exceed these limits, you will be charged for every extra mile.
At the end of the leasing contract, you simply return the car to the leasing company without any further obligations, unless they charge additional expenses for things like exceeding agreed-upon mileage limits or excessive wear and tear.
Pros and cons of leasing
John Wilmot, founder/CEO of LeaseLoco, explains that leasing allows individuals to enjoy the benefits of driving a new car without the responsibilities and risks associated with ownership, such as depreciation and selling the vehicle.
“Leasing a vehicle is a great way to possess a brand-new or newer car without having to pay for the car in full upfront,” he says.
However, leasing a vehicle is not exactly an extended rental.
“Your leasing payments mainly go toward financing the car’s depreciation over your lease term,” says Zander Cook, co-founder of Lease End. “Also, if you return the car at the end of your contract, you don’t build any equity. But you can accumulate equity if you are allowed to purchase the vehicle at the end of the lease and choose to do so.”
Think of the latter option as similar to a “rent-to-own” home. You can acquire equity once your lease expires if the vehicle’s trade-in value is more than anticipated at the end of the lease period. You can use this equity toward purchasing the leased vehicle if allowed.
Here’s a quick summary of how leasing offers several plusses over buying a car:
- Lower monthly payments. “Leasing a car will cost you less per month than purchasing that same car. For example, buying a car may cost you $500 monthly versus only $350 a month if you lease it,” says Melanie Musson, an auto industry expert with AutoInsurance.org. Also, monthly lease payments are more attractive lately compared to auto purchase loan payments due to the higher interest rates associated in recent months with the latter.
- Upgrade flexibility. You can drive a new car every two to four years or so.
- The ability to drive a higher-end or luxury vehicle for a more affordable price. “Luxury cars and models with high depreciation rates are often recommended for leasing, as leasing payments are based on the vehicle’s expected depreciation,” notes Taylor Brody, sales manager for Southtowne Auto Mall in Sandy, Utah.
- The ability to return your car at the end of the lease without worrying about depreciation or selling the vehicle.
- GAP protection. Many leasing companies provide GAP coverage, which safeguards you if your comprehensive or collision insurance falls short of covering the entire payoff value in the event of a total loss of your leased vehicle.
- Coverage for repairs and maintenance. The manufacturer’s warranty will cover many new leased autos for the full length of the lease, meaning you shouldn’t have to pay for covered repairs or upkeep (except damage caused by an accident).
- Buyout flexibility. You may be permitted to purchase the car at lease end, which can be smart if you have earned equity in the vehicle.
However, leasing has its risks and downsides, too, among them:
- Your allowed mileage is limited. If you exceed this limit, you may be charged between $0.10 to $0.25 per mile. “Note that if you put a lot of miles on your leased vehicles that exceed your mileage limit, you may be required to purchase the vehicle once your lease expires unless you can afford to pay for those extra miles,” says Musson.
- It’s difficult to get out of your leasing contract early.
- You may be charged additional expenses, such as for excess mileage and wear and tear.
- It’s difficult to get approved for a lease if you have a poor credit score.
- You won’t build any equity in the car if you don’t purchase it at the end of the lease.
Good candidates for leasing a vehicle
Dennis Shishikov, adjunct professor of economics at City University of New York, says leasing can especially be advantageous for those who enjoy driving a new car every few years and who can adhere to the mileage and wear and tear conditions.
“For example, sales professional who values a modern car for client impressions but who don’t drive extensively could benefit from leasing,” he says. “Conversely, buying may be better for those who drive a lot, prefer long-term ownership, and don’t mind higher upfront costs. A family preferring a reliable vehicle for long road trips and no restrictions on customization or mileage would find buying more advantageous.”
Zander Cook, co-founder of Lease End, believes anyone can be a good candidate for leasing depending on your lifestyle, budget, and preferences.
“Those who are typically looking for lower monthly payments and who don’t drive much should consider leasing,” Cook says. “But if you have a lot of cash on hand and intend to put it toward your car, a down payment on a vehicle is probably a better use of your cash then leasing.”
Types of cars to consider leasing
Luxury cars, high-depreciation vehicles, and full-size trucks are often more suited for leasing, as this method can offer lower monthly payments for more expensive models.
“On the other hand, reliable, low-depreciation vehicles like many sedans and SUVs are typically better for purchasing, especially if long-term use and customization are priorities,” adds Shirshikov.
Then again, smaller commuter cars like Honda Civics can be worthwhile to lease.
“Because of leasing restrictions like mileage overages and wear and tear fees, cars that can get you from point A to point B efficiently are usually ideal candidates. Trucks or off-road vehicles that may experience more wear and tear or additional mileage are traditionally not the best option,” continues Cook. “Ultimately, any vehicle that has a history of retaining its value and equity over time can be a great choice for leasing.”
What to consider before leasing
Before committing to a vehicle lease, carefully ponder your budget and what you can afford.
“Calculate the total cost, including your monthly payments and potential fees or penalties at lease end,” advises Shirshikov.
Also, think about your tolerance for financing versus purchasing a car, how often and how far you drive, and whether or not you prefer a new or used car.
“You also need to consider the pros and cons of having to pay continuous monthly payments versus owning a vehicle you can have paid off in five years or less,” Musson notes.
Cook recommends choosing a lease contract that provides an option to buy out your lease.
“This gives you the right to purchase and keep your vehicle if you like it or don’t want to purchase another one at the end of the contract,” adds Cook.
The bottom line
Leasing an auto provides a simple and streamlined way to drive the latest and snazziest models, often with few strings attached. But be prepared to stay within the allowed mileage limits and keep the car in good condition or you’ll be socked with extra charges.