Does It Make Sense to Lease?
It’s very difficult to make a fair head-to-head comparison between, say, a six-year loan and the standard three-year lease. At the point the lease ends, the bank borrower still has three years of payments to go, but the lessee has to look for another car—or perhaps take the lease’s buyout offer.
An automaker may also kick in extra rebates on a lease deal, ones not available to a loan customer. In addition, the “money factor” (interest rate) on a lease may be different from the interest rate offered on a loan, making an apples-to-apples comparison almost impossible.
Opting for a longer-term loan of six to eight years may bring your monthly payment close to that of a lease, but not invariably.
Longer loans make it easy to get “upside down”—where you owe more than the vehicle is worth—and stay that way for a long time. If you need to get rid of the car early on, or if it’s destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe.
Indeed, buying a car with a loan is not the way to go if you want to drive a new car every couple of years. Taking out long-term loans and trading in early will leave you having paid so much in finance charges compared with principal that you’d be better off leasing. If you can’t pay off the difference on an upside-down loan, you can often roll the amount you still owe into the new loan. But then you end up financing both the new car and the remainder of your old car.
If your goal is to have both low monthly payments and drive a new vehicle every few years with little hassle, then leasing is probably worth the additional cost. Be sure, however, that you can live with all of the limitations on mileage, wear and tear, and the like.
Last, be sure you’ll be able to afford the lease for its entire term, because the early termination penalties can be costly.
The Upside of Leasing
On the surface, leasing can be more appealing than buying. Monthly payments are usually lower because you’re not paying back any principal. Instead, you’re just borrowing and repaying the amount that the car depreciates in the time you have it, plus finance charges. Here are the major advantages of leasing:
- You drive the car during its most trouble-free years.
- You’re always driving a late-model vehicle, and one that’s usually covered by the manufacturer’s warranty, which may include free oil changes and other scheduled maintenance.
- You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford.
- You don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on.
- There could be significant tax advantages for business owners.
- At the end you just drop off the car at the dealer.