Pros and cons of leasing a car
Leasing a car can save you on monthly payments, but you'll rarely earn any equity when your lease runs out. (Photo courtesy of Member James Peterson of Honolulu)
A new car or truck is never going to be worth more than at the dealership.
In the minute it takes to drive it off the lot and onto the street, it can depreciate in value by up to 20 percent; and after five years, up to 65 percent, said Dan Schneider, owner of highly rated Metro Toyota Inc. in Brooke Park, Ohio.
For many drivers, that's a tough pill to swallow. An alternative option to combat a new vehicle's decreasing value is leasing, which is essentially a long-term rental of a vehicle. Leasing remains a popular choice for many drivers.
“There was a drop in leasing around the time the economy dipped, and zero percent financing was heavily advertised,” Schneider said. "Other than that, our business has always been about 30 to 40 percent leasing."
Benefits of leasing
Auto salespeople say there are several benefits to leasing a new car every two to three years, including:
- Lower monthly payments, on average.
- Drivers are only responsible for paying sales taxes on the portion of time they use the vehicle and not on the entire cost of it.
- Staying up with the latest technology, styling and safety features.
"There are new features being added to vehicles every year," noted Michael Comer, a manager at highly rated Huggins Honda in North Richland Hills, Texas. "If you trade in your car for another leased vehicle, you'll have all the new safety features and gadgets."
Some other benefits include:
- Coverage under factory warranty for the term of the lease. Major repairs on a leased car are rare and there is less maintenance expenses, said Jason Heard, with highly rated Frank Ancona Honda in Olathe, Kan.
- At the end of the lease, the driver is not responsible for any more payments and doesn’t have the burden of trying to sell a used car.
"You are able to turn the [leased] vehicle in and walk away," Schneider said. "It is possible to build positive equity in a lease, but you are not responsible for negative equity. Also, most shoppers do not realize they can exit a lease prior to the term expiring. At any point during a lease, the vehicle may be appraised for trade-in. However, in those cases, drivers will likely be subject to penalties and early termination fees.
Leasing is also an ideal option for drivers who use their car for work, as they can write off leasing payments as a business expense, according to auto dealers.
Watch your miles
Auto dealers said leasing has its share of negatives as well.
Leasing actually costs more over time, especially if you’re a serial leasee. A driver will typically have a new car paid off in five or less years, while a lessee will be paying monthly bills continuously.
Another negative to leasing, experts say, are mileage limitations. Drivers who exceed the mileage allowed on their lease can be penalized with hefty excess mileage fees, usually 10 to 25 cents per mile. Many contracts limit the mileage to 12,000 per year.
"They need to realize that they have to pay for the miles they drive, which contributes to the depreciation of the car," Schneider said.
The lessee may also be liable for wear or tear to the vehicle, if it exceeds the limit of his or her lease, and will not be allowed to make modifications to the vehicle, such as installing a new stereo. It’s a good idea to ask for details on wear and tear standards, according to USA.gov. Dings that may be considered normal wear and tear in your opinion, could be viewed by the dealership as significant damage.
It's important to fully understand a lease before signing it, auto dealers said.
A lessee will also rarely earn equity as would a driver who owns a car and is paying it off. It’s possible a driver could earn equity in cases where he or she puts very few miles on the car, or well below what was allowed.
Schneider added that taking good care of a leased car means it will retain its value at trade-in time. Another option, especially if the car is in good shape, is buying it at the end of the lease contract.
Find the right dealership
A standard lease is for 36 months, although some dealerships offer terms between one and five years. The cost of leasing can run as low as $180 a month and go all the way up to $1,500, depending on the make, model and the determined residual value of the vehicle.
"If you drive very few miles a year, your monthly expense is very low compared to [purchasing]," Schneider said. "Leases can include up to 30,000 miles. If you buy a car and drive 30,000 miles a year, you are left with a vehicle in three-plus years with very little value. You have paid for the car and all of the depreciation [that came with driving it off the lot]."
For example, Schneider says Toyota offers two years or 25,000 miles of complimentary maintenance, whether drivers lease or buy.
Before leasing, drivers should ask the dealership about gap insurance coverage. If they wreck the leased car, the insurance will cover the difference between the car's actual market value and the remaining balance to pay the lease off.
The terms of the lease usually allow the lessee and anyone under her or his insurance policy to drive the vehicle.
Comer, meanwhile, recommends leasing only cars that are brand new, adding: "It's better for the customer and more reliable under warranty."
It's also important to find a reputable dealership that has a service department and has a history with its customers of offering fair trade-in value. Drivers can save money on their lease by trading in a car they own.
"Look for the quality of the services," Comer said. "Nine times out of 10, the customers plan on getting it maintained and serviced at the same dealership they leased it from. Don't look for a company that's here today and gone tomorrow. You want to look at the quality of the dealership. Do they have a good service [department]?"