A car lease is an alternative to buying a car in which you pay an agreed-upon set of monthly lease payments to use the car and then return the vehicle to the leasing company once your contract runs out. Every lease agreement has different terms, but most lease deals last for two to five years and base the monthly payments on the vehicle's depreciation over time. Car leasing is a good way to get a new car without making a significant down payment, and it has many other benefits over buying a car.
How Does Leasing Work?
Leasing a car is simple. Just pick out a vehicle you want to lease, and visit a dealer that's willing to lease it. Once you've asked to lease the car, the dealer draws up a monthly car payment plan based on the car's value and your credit score. Such plans frequently last from 36 to 48 months, though some last up to 60 months. You may also need to make a down payment, though it's likely to be smaller than the down payments of 20 percent that many dealers expect from customers buying a new vehicle. Dealers typically offer buyers a choice of one of two lease types: a closed-end lease or an open-end one. In a closed-end contract, you return the car at the end of your lease and pay any extra expenses, such as repair costs, additional mileage fees and fees for excessive wear and tear. Usually, you can also buy the car at the end of a closed-end lease, if desired. With an open-end lease, you must purchase the vehicle once the lease runs out for an agreed-upon sum or pay the difference between the car's market and residual value. Most lease agreements specify the number of miles you can drive each year, with the expectation that you pay for each mile you drive over the limit. A typical limit is 10,000 to 15,000 miles per year. You may also have to pay the dealer a security deposit and a small amount of interest each month, plus a cleanup fee if you leave a mess in the car when you return it.
What Are the Benefits of Leasing a Car?
Car leases have many benefits over buying a car. For one, leases are less of a commitment. If you end up disliking your leased car, you can return it at the lease-end and stop making payments. If you like the vehicle, you can renew the lease or purchase it. Leases give you flexibility. For another, you can always lease new cars instead of used cars, ensuring you don't have to deal with high maintenance and repair costs once the vehicle gets old. Dealers often include warranties in leasing agreements that last until the end of the lease term and cover routine maintenance at a minimum. More importantly, leases can save money, as they have lower monthly payments than car loans and don't require large down payments. Also, you pay sales tax for each monthly payment instead of for the purchase of an entire car. Leasing also means you can drive a vehicle that you can't afford to buy, such as a luxury vehicle.
One of the main advantages of leasing is that it's less complicated than car buying. You don't need to worry about the trade-in value or resale value of a leased car, as you might for a car you own, because you never have to buy a new vehicle so long as you keep leasing. Moreover, you don't need to find a buyer to take the car off your hands. Also, if you buy a car, it's always possible for the market value of the vehicle to fall below the amount you owe for it, such as when driving a brand new vehicle off the lot. Leased vehicles can't be "upside-down" in this way, because you're only paying for the car's depreciation plus interest each month. To avoid having an upside-down car, many people make large down payments when buying a vehicle, ensuring the car starts with positive equity. Buying a car has many other drawbacks that leasing can avoid. For example, you may have to pay steep repair costs when your warranty expires, and you can't simply switch to a new model once the car depreciates a lot. Lease warranties often have extra perks as well, such as free oil changes. Finally, businesses can get special tax deductions when leasing a car.
What Are the Drawbacks of Leasing a Car?
Although a lease contract has many advantages over a traditional car loan, it has some drawbacks, too. For one thing, you don't own the car at the end of a lease unless you choose to buy it. Typically, contracts stipulate the price the dealer is willing to accept for the vehicle when you sign at the outset. Since that figure can't be changed, you may have to pay much more than the market value of the vehicle if you want to buy it. That can be frustrating, especially if you've grown fond of the car and gotten used to its feel, as you may feel obligated to buy it despite the high price. Another downside to leasing is that you never stop making monthly payments, whereas loan payments end as soon as the car is paid off. As a result, if you lease constantly, you might pay much more over your lifetime than someone who buys a car every decade or so and makes it last. Even if a vehicle that's been purchased has a low market value, you can keep it around as an emergency backup for as long as you want. That's not true for leased cars, which have fixed terms. You also can't sell a leased car whenever you want to fund a new one. Another drawback to leasing a car is the mileage limits. If you end up driving over the limit, you may have to pay 10 to 15 cents for each additional mile, though you can also agree to higher monthly payments in exchange for laxer limits. Also, you don't generally get credits for unused miles.
When you lease a car, insurers may charge a higher coverage cost, depending on your age, location and driving record. It's a good idea to get Guaranteed Asset Protection insurance — or GAP insurance — if the lease doesn't include it for free, as it protects you from owing money if the car is stolen or totaled. Although the interest you pay while leasing may not seem like much, it can be a lot in the long run. The additional penalties you might have to pay, such as for wear and tear or cleanup, can also be frustrating. You may feel obligated to keep a leased car clean at all times, which is stressful. Also, you may need to pay a hefty fine if you try to get out of a lease contract early. Depending on the agreement, the fine may include all future lease payments, due at once, plus other penalties. You also can't alter the car much, such as by giving it a new paint job, though window tinting and a few other tweaks may be permitted. Also, some people find leasing more complicated than buying a car, since you have to get the hang of each new car's traction and steering and since you have to set up a new contract at the end of each lease term. Another big drawback to leasing is that most of a car's depreciation happens early in its life, so you're paying a lot more per year when leasing a newer car than an older one.
To get the best deal when leasing a car, there are a few other things to consider. A common mistake many people make is to pay too much for a lease. Any amount below $2,000 is a reasonable down payment. Although you can arrange for smaller monthly payments by making a sizeable down payment, paying less means you don't lose all the money you put into the lease if the car gets totaled, since you don't get the insurance payment if that happens. Another consideration is a flexible-lease program. With a flexible-lease, you only lease the car for a few months at a time, and you can keep renewing the contract for as long as you want. This type of lease is ideal if you don't know how long you need a car or if you can't find a short enough lease for your needs.
When arranging a lease, you have more leverage than you may think. Many dealers expect customers to negotiate down the lease to a capitalized cost with somewhat lower monthly payments than initially offered. Dealers are often willing to pay a much lower "cap cost" than customers assume. Also, when leasing, keep in mind that some dealers may offer a low residual value — the value for which they're willing to sell the car at the end of the lease — if the vehicle has a high depreciation rate. If you're not careful, you may assume the low residual value is a good deal, when in fact the car may be so depreciated by the end of the lease it may be nearly worthless. Another consideration when choosing a lease is that dealers sometimes offer special rebates for a lease contract that they don't offer for loans. Finally, it's important to remember that the residual value in your agreement influences the size of your monthly payments.
Leasing a car is a great option for people who need a good vehicle for their new business but can't afford to buy one or who want to drive a variety of makes and models throughout their life. A car lease is less useful if you don't want to make monthly payments forever and prefer to own what you pay for. Overall, car leasing has many benefits over buying a car.