A vehicle lease is essentially a long-term rental agreement that allows you to use the vehicle for a contract-designated period, usually 36 to 48 months. Unlike a purchase involving monthly payments, a lease’s payments will not go toward ownership of the vehicle. While this may sound like a major drawback, sometimes leasing a vehicle may make more sense based on the priorities of the driver. Here are a few key considerations to consider if you are debating leasing versus buying a vehicle.
Car Loans vs. Leases
Car loans and leases both involve monthly payments, but the nature of these agreements varies drastically. A monthly loan payment for a new car will usually be higher than a lease payment. This can make leasing a good option for those who do not have the funds to purchase a new vehicle via a traditional car loan. Car loan payments go toward building equity in the vehicle, and you will own it once the full loan has been paid. A lease payment does not build any equity, and the leaseholder has no claim to ownership after the lease term has expired.
Benefits of Leasing
Along with lower monthly payments, there are a few other potential benefits of leasing instead of buying:
- Maintenance coverage – Many lease agreements include a warranty of three or more years. This means that the repairs of a vehicle on a three-year lease would be covered at no expense to the leaseholder.
- Frequently driving new cars – Some drivers enjoy frequently driving different new cars rather than sticking with the same one until it breaks down. Leasing is a convenient way of doing so.
- The convenience of no resales – Reselling your used vehicle can be a time-consuming and difficult experience. Drivers who want to avoid this process sometimes choose to lease instead of buy.
- Tax deductions – Leasing makes more sense than buying for certain types of business due to tax write-offs. Cars that are used for business purposes often qualify for more deductions, including financing costs and depreciation.
Potential Drawbacks of Leasing
As mentioned, the lack of equity-building is the main drawback of leasing versus buying. Leasing may be a negative in the financial big picture because your monthly payments do not go toward ownership of the vehicle. Additionally, most leases also include an acquisition fee to initiate the lease, which is not part of a conventional car loan. This usually means that buying a car is far cheaper in the long term.
Leasing also gives drivers less control over the customization of their vehicle. Lease contracts often discourage or prohibit customization and may require the leaseholder to remove any modifications and restore the vehicle to its original build before returning it.
A serious car accident can also become more complicated when a leased vehicle is involved. Depending on the terms of the lease, the driver could be liable for a portion of the damages not covered by their car insurance. However, some leases include car gap insurance that covers any necessary costs until the lease expires, even if the vehicle is totaled.
How Are Lease Payments Calculated?
While monthly car loan payments are calculated based on the sale price, interest rate, and repayment period, calculating lease payments may involve several other factors:
- Sale price – The dealer and prospective leaseholder negotiate a price, just like they would a vehicle purchase.
- Repayment period – The number of agreed-upon months for the lease, usually 36 to 48 months.
- Expected usage – The lease terms include a maximum number of miles that can be driven in the vehicle each year, usually 12,000 miles. There is the option to increase the maximum mileage in exchange for higher monthly payments. Drivers who exceed the maximum mileage will owe the dealer for each extra mile.
- Residual value – The expected value of the vehicle at the end of the lease based on depreciation. The driver may have the option to purchase the vehicle for the residual value at the end of the lease.
- Rent fee – Essentially an interest charge.
- Taxes and fees – These are included in the lease agreement as part of the monthly cost.
Is Leasing Worth It?
Leasing can allow you to drive a new car that you otherwise might not afford, but the disadvantages should not be ignored That being said, leasing can still be a viable option depending on what your current priorities are.
Maybe you’re temporarily working in a city with no public transportation, and you need a vehicle to get around. In this example, leasing would be a more convenient way to get on the road.
But if you’re concerned with building equity long-term and the potential financial drawbacks, buying will likely be the best choice. It’s important to note that buying is virtually always going to be cheaper in the long run compared to leasing the same vehicle.