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September 4, 2020
Leasing is a popular car-buying option for many consumers. Often, car shoppers go to the dealership with the intent to purchase a car, but switch to the leasing option to get a car they otherwise couldn’t afford. The decision is a challenging one to make. Lease vs. finance? Which is best?
Leasing may make sense for some buyers; however, it can cause problems for others. Remember, you don’t own the car. You make payments for the term of the lease (typically 2-4 years) and at the end of that period, you walk away with nothing and may even be required to pay a termination fee of several hundred dollars. Worse yet, if you turn in the car and it has body damage or your mileage is over your annual allotment, you’ll be required to pay hefty fees to the dealer.
So, which is right for you: lease vs. finance? These guidelines could help you decide.
You should CONSIDER FINANCING AND BUYING THE CAR IF:
- You’re keeping the car. If you will definitely keep the vehicle more than three years, buying is typically a better option.
- You drive too much. Leases typically limit you to 10,000-12,000 miles per year. You can negotiate more miles on your lease; however, you will pay a premium. When you return the car at the end of the lease term, you will have to pay a penalty for any miles driven over the annual limit.
- You need the car longer than three years. You shouldn’t get into a lease with a term longer than three or four years. After that time, you will end up spending extra money maintaining a car for the dealer. Additionally, you may be required to pay for an extended warranty if the term exceeds the normal warranty period.
- You want to pay off your car. If you look forward to the day you’ll be car payment-free, a lease is not a good option for you. At the end of your lease, you will not own the car or have any “equity” with which to make a down payment on a new car. You may be forced into another lease. Even if you keep the car, you’ll have to refinance.
You should consider a lease if:
- You change cars often. If you’re a driver who buys a new car every two years, a short term lease could benefit you.
- You can secure a significantly lower payment. Leasing can be a cheaper option if you’re able to get significantly lower monthly payments compared to buying. That’s because payments are calculated on depreciation costs – the difference between the price of the car and the value of the car after the lease ends. Cars that hold their resale value tend to facilitate a lower monthly payment.
- You use your car exclusively for business. Your business may be able to deduct or write-off leasing expenses, depending on where you live and your business. Consult your tax advisor regarding your situation.
- You drive very few miles. You may be able to negotiate a low-mileage lease at a lower cost. However, be realistic. It’s significantly cheaper to pay for those miles up front than the penalty fees at the close of your term.
If you decide to lease, here are some important facts and questions:
- Fees. Taxes and fees are NOT included in advertised lease payments. Ask if you will be required to pay drive-off or up-front fees, a deposit at closing, a disposition fee at the end of the lease or excessive wear and tear costs. None of those expenses will go towards the cost of the car or lease payment. Factor in those costs over the term of the lease.
- Qualifications. Changes in the auto marketplace have limited which consumers will be able to lease. Dealerships are often inundated with returned lease cars, with few options to resell them. For that reason, affordable leases may be limited to very high credit scores.
- Limitations. Before you sign, check the mileage limitations, all fees and charges, the “factored” interest rate, the length of the lease, and the balloon payment if you decide to “buy out” the lease, or keep the car.
- Insurance. Talk to your insurance company about the differences in coverage on a leased car. Ask specifically what happens if the car is totaled or significantly damaged in an accident. You should ask about the cost of GAP (guaranteed auto protection) insurance in your contract to cover the difference between what your car is worth and what the insurance company will pay if the car is totaled or seriously damaged in an accident.
As you evaluate leasing vs. financing, educate yourself and ask questions before you decide to get a new car. All-in-all, you want to feel good about your decision and make sure it fits with your financial goals. Good luck and happy car shopping.