Leasing a vehicle is an alternative to purchasing a vehicle. It allows you to drive a new model while not having the obligation to worry about debt payments. Although you still make a monthly payment, it’s a relationship that’s closer to renting an apartment. You can decide to go in a different direction for your automotive needs when the contract expires. If you bought the car, then you’d need to sell it or dispose of it some other way.
If you’re in the market for a new vehicle right now, then the advantages and disadvantages of leasing a car are worth reviewing. Could it be a better choice than taking out a loan?
List of the Advantages of Leasing a Car
1. You will have a lower monthly payment when you choose to lease.
If you decide to purchase a car, then the lender will give you a repayment rate that’s based on your credit history and down payment. That means you can get locked into a long-term payment that could be $250 or more – a process that could take 4 to 7 years to complete. When you choose to lease a car instead, then you’ll receive a 12- to 36-month offer with a fixed payment that’s typically lower.
If you don’t want to drive a luxury brand, then you can typically find a lease agreement that can get your monthly payment below $200. You’d still have the sales tax and overhead costs to pay, but it is an affordable option to consider.
2. You will consistently drive newer cars.
When you choose to lease a car instead of buying one, then you can drive the latest models of your preferred brand every 1-3 years. Although that means you will always have a car payment to make, it also gets you out of a vehicle that might not be any fun to drive anymore. You’ll need to meet the stipulations of your agreement to avoid extra costs, but it is an advantage of leasing that allows most drivers to start driving something new.
You’re never put into a situation where you must pay extra to keep the vehicle running if something happens because you have enough coverage under the agreement. You can upgrade at the end of the contract, turn in the vehicle, and then pick up a new one with your licensing, sales tax, and required down payment.
3. Leasing a car eliminates problems with a warranty.
When you purchase a new car, it can lose a significant amount of its value the moment that you drive it off of the lot. If you get into an accident or have it break down before you get through the first year, then you could be stuck with a huge repair bill – assuming that you can even get it operational again. Purchasing an extended warranty isn’t cheap for many families either, with the cost sometimes as much as 10% of the listed price of the vehicle.
Leasing a car eliminates this worry. You are always covered if something breaks down because you’re renting the vehicle. That means if something happens that isn’t your fault, then the dealership or the manufacturer will correct the situation. Some contracts have stipulations against this benefit, so you’ll want to review the terms and conditions of your agreement carefully.
4. Leasing a car allows you to avoid the price negotiation sequence.
Trying to negotiate the final price of a new car isn’t a fun process for most people. Dealerships want the most revenues possible, and salespeople are dependent on a solid sale for their income. You’re trying to counter those issues to save some cash. When you decide to lease a car instead of purchasing one, then you get to avoid this headache. Most leasing contracts are set in stone before you start looking at vehicles.
That means you can start driving your new car instead of sitting in the finance office of the dealership. It’s an experience that has a lot less stress.
5. You get to avoid the problems with depreciation.
Over the first four years of ownership, a new car will lose about 60% of its total value. One-quarter of the depreciation amount typically occurs immediately. That means you can lose thousands of dollars of value by the time you get the vehicle home, which puts you underwater on the loan for the first 12-24 months. You’ll need to purchase insurance coverage to cover that problem if you total the vehicle during this time.
When you lease a vehicle, then you don’t need to worry about this issue. You’ll drive it until you’re ready to take on another lease. You might have the option to buy the car you’ve been driving at a discount after your agreement expires, which could save you some money in the long run.
6. Most people can afford a better car when they lease.
Since the monthly payments of a leased vehicle are lower, most drivers can afford a better or more expensive vehicle. You can walk away from the dealership with more advanced features, improved options, or a better make and model. Although you’ll still have the monthly payment responsibility, it can be tempting to take advantage of this upgrade. You’re also driving a late-model option because of this advantage almost all of the time, which gives you access to the best features and safety options that are in the industry today.
7. You’re driving the car during its trouble-free years.
Although there are exceptions to this advantage, most leases allow you to drive a car when it’s unlikely to experience a mechanical issue. The first three years of ownership are typically the best, especially if you are a low-mileage driver. If you aren’t on the road a lot, then you can see a significant amount of savings because there are fewer risks that can happen with the vehicle. Since it’s usually covered by the manufacturer’s warranty during this time, you might even receive some perks like free oil changes or discounts on the regularly scheduled maintenance.
8. Some drivers may experience some tax benefits by leasing instead of buying.
When you own a business, leasing a vehicle becomes an expense that you can deduct from the company’s income. If you’re a sole proprietor, then this cost could reduce your self-employment obligations. Although you’ll need to prove a percentage of personal and professional use when taking this option, you might discover some rebates can be favorable in this situation.
Tax laws are subject to change, which means this benefit of leasing a car may not always be available. You’ll want to speak with your financial advisor about this option if you’re wanting to bring home a new vehicle soon.
9. You can drop-and-go when your lease is up.
Dealerships often offer the option to purchase a car after the lease period expires. If you haven’t gone over the mileage stipulation and have left the vehicle in good condition, then you’ve got the option to drop the car off at the dealer without added expenses. The cost of a lease can still be more than a loan based on depreciation and how well you followed the terms of your agreement, but you’re not stuck with an asset that you no longer want with this activity.
10. Drivers can avoid the initial sales tax and down payment requirements in some jurisdictions.
Leasing companies charge a fee to originate the agreement at the dealership. It can be called an acquisition fee, a bank charge, or an administrative cost. It’s usually somewhere between $350 to $1,000, depending on the make and model you choose and the dealership. Most agencies will bundle this cost into the monthly payments so that you don’t have an upfront cost, although you might only receive this benefit if you have a credit score that’s high enough.
List of the Disadvantages of Leasing a Car
1. You must prove that you have a stable income source to lease a car.
Dealerships will not approve an offer to lease a car if you’re unable to prove that you have income, employment, or sometimes both. Having a regular paycheck doesn’t always meet this obligation. This issue can be problematic for contractors, self-employed individuals, and people who work seasonally.
Even if you do receive approval to lease a car in these circumstances, then you must have a way to make your monthly payment obligations. Failing to make a payment can lead to repossession, credit score problems, and more.
2. Most insurers will require you to purchase gap insurance.
Whether you buy it directly from your dealership or through an insurance provider of your choice, gap insurance is almost always required when leasing a car. This policy covers the amount of the vehicle’s value that changes once you drive it off of the lot. Most of the policies remain in effect for at least three years, and it may be part of the upfront costs that you pay to start the agreement. If you were going to buy a car instead, then this charge becomes optional. You can choose to take on the risk personally if you prefer.
3. Leasing agreements restrict how you can use the new car.
Most contracts restrict the total number of miles you’re permitted to drive over the lifetime of the agreement. You might need to report to the dealer for an odometer reading in extreme circumstances over the lifetime of the lease. If you want the most affordable vehicle possible, then you’ll experience severe restrictions in this area.
Most leases allow you to drive between 12,000 to 15,000 miles per year. You must also keep the vehicle in excellent condition (usually defined as “resalable”) to avoid added costs or reductions to a security deposit. It can be several thousand dollars of additional expenses if you violate these terms and conditions.
4. The dealership might still require a significant down payment.
You need to have a significant amount of money available as a down payment if you want to lease a vehicle. The cost is usually lower than the 20% recommended when buying the car, but it can still be a significant number. It is not unusual to have $4,000 or more required out-of-pocket to take the vehicle home. This cost covers the licensing fees, initial payment, and miscellaneous costs as outlined by the agreement.
When you consider the average lifespan of a six-year ownership period, the one advantage that a lease offers is the option to upgrade the car. You’ll make a similar monthly payment, but it comes with a new vehicle after three years. That means a second significant down payment is also required.
5. You don’t receive credit for unused miles.
Your lease will specify the exact number of miles allowed over the agreement. If you don’t use your full allotment, then you won’t receive any credit for that outcome when you turn in the car at the dealership. If you happen to go over, even if it is only by a single mile, then you’ll have fees or penalties to pay.
Every lease is unique, which means you could pay up to $0.50 for every mile that goes above the limit listed in the contract. If you have an overage of 5,000 miles, then that could add $2,500 to the final cost of your lease. You might have extra wear-and-tear fees to pay because of this issue, reducing the financial benefits of this approach.
6. You don’t have a way to terminate the lease.
If you need to get out of your monthly payments because your financial situation changes, then leasing a car provides few options. Early termination fees can be equal to the extra mileage charges that you’d pay at the end of an agreement. When you buy a vehicle, you can transfer the loan to someone else with the permission of the lender. You’ll also have the option to sell the car to pay off your debt.
7. It can be more expensive to lease a car than to purchase one.
Leasing typically costs more in a long-term perspective than buying. You’ll reach the breakeven point at the six-year mark. Once you go beyond that time, then the lack of payments for a purchased vehicle will create more financial benefits. If you look at your 10-year expense profile, it’s almost always cheaper to buy instead of lease.
That’s why you should look carefully at your long-term needs. If you plan to always have a car payment because you’re constantly upgrading your vehicle, then a lease makes sense. When dollars and cents are the top priority, then looking for financing options could be a better choice.
8. You lose the option to make modifications to the car.
Dealerships do not allow you to make any modifications to a leased vehicle. You’re required to return the car in showroom condition to avoid any fees or penalties. Tinting or restoration work may be exceptions to this disadvantage, but you cannot change the engine, exhaust system, or other options unless you remove them before delivering the car at the end of the term. If you bring the car in for regularly scheduled maintenance and mods are present, then it might be a violation of the agreement. You’d be subject to forfeiture, fees, and additional costs.
9. Your monthly payments never stop when you choose to lease.
The issue with leasing is that you never receive a reprieve from the monthly payments. When you own a car, then you will eventually pay off a loan. You can even purchase one outright with cash or credit to avoid the financing process altogether. This issue may not be a problem for some households because it is a predictable expense, but it could be a crucial consideration for others.
10. Some states require you to pay an additional tax on a car lease.
RCW 82.09.020(3) in Washington State requires an additional tax of 0.3% on the sale or lease of all motor vehicles. It’s referred to as the motor vehicle sales and lease tax. That means you must pay this additional amount with the agreement. The only exemptions in WA are for farm vehicles, off-road cars, snowmobiles, and non-highway vehicles.
It even applies to the extra features added to the car prior to its delivery to the buyer. If you agree to have a hitch added to a truck, then you’re paying the extra cost. All states have different rules to follow, so you’ll want to verify your responsibilities in this area before finalizing an agreement.
If you like the idea of saving money on your monthly car payment, then leasing is an idea that makes sense. This benefit applies when you have a direct comparison between the same make and model. Since many drivers seek upgrades because of the cost-effectiveness of this arrangement, it is not unusual to spend as much, if not more, on a lease versus a loan.
When the limitations of a lease are off-putting, then it might be a better choice to purchase a less expensive new car. You could also consider a certified pre-owned vehicle from a franchise dealer to meet your cost requirements. Then work to choose a vehicle that can hold its value, remain reliable, and maintain a robust fuel economy.
The advantages and disadvantages of leasing a car can be challenging to consider because of the variety of agreements and lending options that the industry provides. When your goal is to have a new vehicle every few years and a low monthly payment, then leasing is probably the best way to go.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.