Recently, a friend of mine told me she was thinking about leasing her next car. I immediately told her that was a bad idea. When she asked my why, my only explanation was “because my dad told me never to lease a car.” Obviously this was not a valid explanation. I decided to do some research on the pros and cons of leasing or buying. Here is what I found.
Let’s start with monthly payment. Leasing a vehicle lends itself to a much lower monthly payment because the payment doesn’t cover the full value of the vehicle. When leasing a car you are responsible for covering the depreciation in value for the term of the lease. This value is much lower than if you were to take out a car loan. Essentially the same car that costs $400 per month with a loan may only cost $235 per month to lease. By simply looking at the amount of the monthly payment it may seem like it’s a no brainer to lease a car instead of buy. However, it is vital that you think about where that payment is going. When you are leasing you are throwing your money towards someone else’s investment (in this case it’s the dealership since they can sell the car for profit when you’re done with it). If you buy the car you are paying more per month but you are supporting your own investment. Eventually you will have no car payment and of course you can always sell the car or trade it in.
Now let’s look at the type of car you want and how long you plan on keeping it. When you lease a car you are limited to only buying a new vehicle and therefore you’re paying a higher price. If you are someone who doesn’t mind buying a used vehicle you can most likely find a used car for the same monthly payment as you would pay to lease a new car. If you only plan on keeping the car for 2-3 years, then leasing may be the better option. At the end of the lease you are able to switch to a new car. If you buy the car and only keep it for a short period of time you will lose money when trading it in because of depreciation. On the other hand, if you plan on keeping your car for longer than the length of the loan you will save money by not having a monthly payment at all once the loan has been paid.
A leased vehicle comes with a substantial warranty which means you won’t be paying high repair costs. Buying your vehicle comes with inevitable maintenance costs. Even if you purchase a new vehicle with a warranty you will eventually incur some sort of repair costs. Especially if you keep the car long enough to have no monthly payment. But leasing a vehicle comes with a lot of “extras”. You have a limited amount of mileage you can travel. Exceeding the allotted mileage on the lease, results in paying a surcharge when the lease is up. If your car has more damage than standard wear and tear you may also incur a surcharge. Meaning you need to look at how far you travel on a regular basis before deciding if a lease is a good idea.
So I guess my dad’s advice to “never lease a car” should have been “Make sure you weigh all the pros and cons when deciding whether to lease or buy”. I’ll be sure to let him know.