Auto Loans:  Should You Lease or Buy Your Next Car?

Almost all financial advisors advise you not to lease a new vehicle because it isn't a good deal.  After all, when you buy a car, you own it when you have paid it off; however, with a car lease, you pay a lot of money and have to return the car at the end of the lease where you are often charged more fees for excessive mileage or damage to the car.  Most people who lease cars rather than buy them choose leasing because they want to buy a car they can't really afford.  This isn't a sound financial practice, but if you are interested in leasing a car anyway, please learn more about car leasing before taking the plunge.

First of all, be aware that there is federal legislation that protects consumers when leasing a car.  The Federal Consumer Leasing Act gives you the right to information that helps you understand and negotiate your new car lease.  A number of car leasing options are available.  Look for the car lease that best fills your needs, your budget, and your driving patterns and remember to read the car lease agreement very carefully before signing it.   When you lease a vehicle, you may purchase the vehicle at lease end if you have a purchase option, or return the vehicle at lease end, pay any end-of-lease costs, and "walk away." 

Consider beginning, middle, and end-of-lease costs: At the beginning of the car lease, you may have to pay your first monthly payment; a refundable security deposit or your last monthly payment; other fees for licenses, registration, and title; a capitalized cost reduction (like a down payment); an acquisition fee (also called a processing or assignment fee); freight or destination charges; and state or local taxes.

During the car lease, you will have to pay your monthly payment; any additional taxes not included in the payment such as sales, use, and personal property taxes; insurance premiums; ongoing maintenance costs; and any fees for late payment.  You will also have to pay for safety and emissions inspections and any traffic tickets.  If you end your car lease early, you may have to pay substantial early termination charges.  At the end of the car lease, if you don't buy the vehicle, you may have to pay a disposition fee and charges for excess miles and excess wear, depending upon the terms of your lease agreement.

You can compare different car lease offers and negotiate some terms

  • The agreed-upon value of the vehicle:  a lower vehicle value can reduce your monthly payment
  • Upfront payments, including the capitalized cost reduction
  • The length of the car lease
  • The monthly car lease payment
  • Any end-of-lease fees and charges
  • The mileage allowed and per-mile charges for excess miles
  • The option to purchase either at lease end or earlier
  • Whether your lease includes "gap" coverage, which protects you if the vehicle is stolen or totaled in an accident
  • Make sure your FICO credit score is at least 750 before trying to obtain a car lease. 

Know your rights and responsibilities when leasing a car

You have the right to:  (1) use it for an agreed-upon number of months and miles; (2) turn it in at lease end, pay any end-of-lease fees and charges and walk away; (3) buy the vehicle if you have a purchase option; (4) take advantage of any warranties, recalls, or other services that apply to the vehicle. 

You may be responsible for (1) excess mileage charges when you return the vehicle specified in your car lease agreement; (2) excess wear charges when you return the vehicle such as for body damage or worn tires; (3) substantial payments if you end the car lease early, and usually the earlier you end the lease, the greater these charges will be.  Use our Car Leasing Vs. Buying Calculator to do a cost comparison.

How leasing a car differs from buying a car.  Is it better to lease or buy a car?

The major way car leasing differs from car buying is that you do not own the car at the end of the lease.   When you lease a car, you get to use it but must return it at the end of the lease unless you choose to buy it at that time. 

Special Warning for Those Turning in a Car at the End of A Lease:  There have been reports that people have turned in their cars at the end of a car lease and the car company alleged that they turned in the car in bad condition and charged them as much as $2,000 for a cleanup fee.  If you do plan to lease a car or are planning to turn one in, make sure that you document the condition of the car just before turning it in by taking pictures or taking a video of the inside and outside of the car.

Leasing also involves --

Upfront costs when you lease a car may include the first month's payment, a refundable security deposit, a capitalized cost reduction (like a down payment), taxes, registration and other fees, and other charges.

Monthly payments.  Monthly lease payments are usually lower than monthly loan payments because you are paying only for the vehicle's depreciation during the lease term, plus rent charges (like interest), taxes, and fees.

Early termination.  You are responsible for any early termination charges if you end the lease early.  (When you purchase a car you are responsible for any pay-off amount if you end the loan early.)

Vehicle return.  You may return the vehicle at lease end, pay any end-of-lease costs, and walk away.

Market value of vehicle.  The lessor, not you, has the risk of the future market value of the vehicle.  (When you purchase a car, you have the risk of the vehicle's market value when you trade or sell it.)

Mileage.  Most leases limit the number of miles you may drive (often 12,000-15,000 per year).  You can negotiate a higher mileage limit and pay a higher monthly payment.  You will likely have to pay charges for exceeding those limits if you return the vehicle.

Excess wear.  Most leases limit wear to the vehicle during the lease term.  You will likely have to pay extra charges for exceeding those limits if you return the vehicle.

End of term.  At the end of the lease (typically 2-4 years), you may have a new payment either to finance the purchase of the existing vehicle or to lease another vehicle.

Next Topic:  Zero Percent Financing

See also:   Car Leasing vs. Buying Calculator

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