by Stephanie Miles

Pros and Cons of Leasing Your Next Car

Man entertaining a group dining of cars

Leasing a car or truck doesn’t always mean throwing money down the drain, especially if you prefer driving new vehicles for reasons having to do with safety, performance, and maintenance costs. Rather than trading in a vehicle after just a few years on the road and accepting the depreciation loss, you can actually come out ahead by leasing. Leasing comes with fewer upfront costs, reduced monthly payments, and a reduced chance of any unexpected repair bills. Most states also offer tax benefits to people who choose to lease, charging sales tax only on the monthly payments versus the entire sales price of the vehicle.

Of course, vehicle leasing is not without its downsides. When you lease a vehicle, you aren’t building equity in your car, you’ll never be without monthly payments, and you can run into steep penalty fees for driving too many miles during your lease term. If you’re a person who is willing to wait until your loan is paid off before trading in your car or truck for a new model, then you’ll almost always come out ahead by buying rather than leasing.

Tell someone she can get a shiny new car with almost no money down and low monthly payments, and you’ll see why leasing has become so popular in the United States. Nearly 19% of all vehicle transactions in 2010 were leases, up from 13% in 2009, according to the automotive research firm R.L. Polk.

Leasing has been an appealing option for cash-strapped consumers as used car prices have skyrocketed in recent years. In a 2011 article in the New York Times, economist Paul Taylor blamed this pricing increase on the lack of used inventory. Fewer Americans bought new cars during the economic downturn in 2008 and 2009, so there are fewer used cars being traded in today. This increase in used vehicle prices has led to an unexpected benefit for people with three or five-year leases, since the residual value of their vehicles — that is, what the car is expected to be worth at the end of its lease term — is likely to be much lower than the actual value. As a result, drivers with leases are getting a great deal when they purchase their vehicles at the end of their agreements.

Hidden Costs of Leasing

When most people think about leasing a new car or truck, they aren’t thinking about all the extra fees that go along with it. In addition to mileage-overrun costs, early termination charges, and vehicle return fees, you should also be wary of any “protection products” or service contracts your dealer offers. These products, which can include maintenance plans, dent repair, key replacement, and windshield protection, often come at a cost that exceeds what you would normally pay to repair these issues on your own. The Federal Reserve offers a useful guide for comparing competing offers and provides information about negotiating on leasing terms.

Buy or Lease?

Whether or not it makes financial sense for you to buy or lease a vehicle depends on a number of independent factors, including the length of time you plan to own the vehicle, how often you drive, and how much of a down payment you can afford. People who commute long distances and plan on driving the same vehicle for five or more years will usually find that buying makes the most sense, while people who don’t want to deal with the maintenance of an aging vehicles will often find that leasing is the better option. Smart Money magazine has come up with a Buy or Lease calculator, which weighs factors such as the vehicle price, down payment, monthly payment, lease terms, and residual value when coming up with a customized recommendation for drivers.

As usual, there’s no easy answer, but it’s not hard to determine which option fits best with your needs and goals. Cars are very personal for some; others can approach them more objectively. Whatever your vehicle means to you, there are plenty of resources to help decide what’s best for your budget, and for you.

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