Is Leasing a Car a Good Financial Decision?

Woman Buying a Car

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When you are thinking of purchasing your first car, you might wonder if it makes more sense financially to buy a new or used car, or to lease a car. This is an important decision, and you'll need to understand the terms and conditions involved in both a lease and purchase so that you can make a comparison. Generally speaking, it's better to buy a used car rather than leasing a car.

A car depreciates the most rapidly in its first three years, so at least financially speaking, it's best to purchase a car that is two to three years old. You may be considering leasing a car because you prefer a new car, or because the monthly payments are lower than the payments on a new car loan. Learning more about how leasing a car works can help you make your decision. 

How Does a Car Lease Work?

Generally, when you lease a car, the dealer will require you to make a down payment on the lease. This payment, called a capital reduction, is like paying a portion of the lease in advance. Then you will make monthly payments on the remaining lease balance for the length of the lease.

Usually, these payments are lower than they would be if you were purchasing the car, because you're only financing the portion of the car value that you'll be using over the typically three-year life of the lease. The lease will have requirements that you need to meet to avoid any additional charges at the end of the lease term.

One of these is a mileage limitation. Your lease will specify the number of miles that you can put on the car during the lease without having to pay a per-mile charge for going over your lease limit.

If you go over your lease mileage, you will be assessed an additional fee per mile over the limit. You may also be assessed additional charges for any bumps or dings to the car, unless you pay to get the damage repaired before turning the car in.

You will need to keep up the regular maintenance on the car. At the end of the lease, you will have the option to purchase the car for its residua value, by buying out the lease, or you can turn the car in. 

  • Check the terms of the lease including buy-back options and mileage
  • Get everything in writing including maintenance requirements

Some car manufacturers such as BMW include all regularly-scheduled maintenance at no additional cost for the life of the car lease. Check with the dealer for your desired leased car model to see if they offer a similar deal.

The Benefits of Leasing a Car

A car lease usually offers lower monthly payments than if you were buying the car. If you feel like you always need a new car, this is a way to get into a new model every few years. You typically only need to do maintenance in the first three years of owning a car, which means you should not have to deal with major car repairs.

While you may end up with a lower monthly payment, over the years, you will never be without a monthly car payment if you continue to lease. Additionally, you will need to have a down payment for your lease every few years, and you won't have any trade-in value if you're getting out of one lease and into another. If you are planning on leasing your cars continually, plan to cover the down payment every three years, which means you need to save money in addition to your monthly lease payment.

What Are the Disadvantages of a Car Lease?

Leasing a car presents many financial issues. For example, at the end of the lease you have nothing to show for all the money you've spent. You must either turn the car into the dealer (where they try to convince you to trade up to a new lease), or you must purchase the car at the end of the lease.

There are also hidden fees associated with leasing a car. Often the mileage limits are difficult to stay under, and you may find yourself paying over-mileage charges at the end of your lease.

Although a car is not an investment, purchasing a car gives you the option to pay it off and drive it for a few more years while not having a car payment. You can also sell the car and get some money for it to put towards your next car when you are ready to move on. In some cases, you can break a lease without penalty. 

How Can I Save Money on a Car?

The way to save the most money on a car is to purchase with cash. You need to be sure that you can afford any payments that you choose. Imagine what you could do with your money if you didn't have car payments to worry about. This would give you extra money to save or to have fun with. You will save the most money by buying a reliable used car and by taking proper care of the car.

When you purchase a used car, take it to a mechanic you trust and have it inspected so that you know the car you're buying is in good condition.

Take time to research the model and year of the car you want and research the car title, especially if you are buying from a private seller. 

If you can't pay with cash make sure you don't take out car payments you can't afford. You can get prequalified, or even take out a used car loan and approach the seller with a check from your financing company.

Generally, it's best if you're able to pay off the car within three years, which keeps the amount you pay for interest to a minimum. As a benchmark, your total monthly debt, which would include your car payment fi you finance it, should be less than twenty-five percent of your current income. If you stick within these parameters, you will keep yourself in a much better situation financially.

If you are having trouble qualifying for a car loan, you may have to buy with cash, which can limit your purchasing power. You must meet the same credit qualifications if you lease or buy. You may want to consider investigating and joining a car share for transportation while you save up cash to purchase your car.