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3 Situations When Leasing a Car Makes Sense

In all, last year was a pretty remarkable for the U.S. auto industry, with auto sales increasing nearly 8% to 15.6 million light cars and trucks, the highest annual sale level since before the recession. 

Not only did we see vehicle sales surge higher, but we're also witnessing strength in nearly all facets of vehicle sales, from high- and low-end price points, as well as new and used purchases. Interestingly enough, we're also seeing quite the surge in the number of Americans choosing to lease their next vehicle.

Source: Emilio Labrador, Flickr.

According to a study from J.D. Power last July, leases accounted for 22.5% of all new-car transactions during the month, continuing a trend of high lease rates that haven't been seen in nearly a decade. Leases themselves, however, often have a bad reputation, as there are a number of negatives that accompany leased vehicles. The prime objection to leasing, of course, is that you'll have no equity in the car you're driving once you turn it back in -- it's nothing more than a glorified rental. That alone is enough to dissuade certain buyers from even considering a lease.

I, too, swore off leasing in my past car purchases -- but that doesn't mean leasing doesn't serve a purpose within the automotive sector. There are three instances where leasing a car, rather than buying a car, actually makes sense.

Here are those situations, in no particular order:

1. If money is no object.
The big drawback of leasing a car is that you'll have no equity in it whatsoever when you turn it back into the dealership. Worse yet, you could be liable for per-mile charges over the usual 10,000 to 12,000 miles per year agreed upon in your lease contract, as well as repairs that aren't covered under the manufacturer's warranty. But if money is no object, then you can enjoy the finer points of leasing, which involve driving a brand-new vehicle every couple of years.

Leasing often involves a lower down payment than outright buying a car, meaning less money out of pocket upfront, which, even when money is no object, helps move new luxury vehicles off the lot. Newer vehicles also have fewer maintenance issues, meaning fewer problems for lessees to concern themselves with. Finally, with no actual ownership, lessees will never have to worry about having to try to sell the vehicle at a later date. This also protects lessees from excessive vehicle depreciation, which is always a concern when purchasing luxury vehicles.

2. If you want a first-generation vehicle.
Another smart reason to consider a lease is if you want drive a first-generation car featuring a new technology or design. While consumers always seek out the latest and greatest technology, drastically altered engines and body styles are rarely perfect on the first attempt and usually take a few years to work out the kinks. This means most new car buyers aren't making a wise decision when purchasing first-generation vehicles.

MSN, for instance, makes a strong case by pointing to electric vehicles as the perfect reason to lease. For example, there's General Motors' (NYSE: GM  ) hybrid electric-gas Chevy Volt. Recent chatter suggests that its next-generation model has will increase mileage by as much as 20% while its price could dip notably. If you purchased the first-generation Volt, which also suffered from a number of battery concerns, you're probably not a happy camper.

Similarly, Hyundai Motor is planning to introduce the option to lease its hydrogen fuel-cell-powered Tucson crossover SUV beginning this year. With but a handful of hydrogen-powered cars on the road, little is known how many problems could arise from this new fuel technology, making purchasing this vehicle a risky proposition. Leasing would again be a smart option in this instance, because if there are a number of repair issues, lessees could simply walk away after their leases are up.  

The one problem you may run into with trying to lease first-generation vehicles is that some manufacturers simply won't let you. As Foolish car guru John Rosevear pointed out in October, Tesla Motors (NASDAQ: TSLA  ) simply doesn't allow its cars to be leased because the auto industry has no clue what sort of residual value will be left once the lease is up. Tesla does offer a lease-like financing option, however, but it doesn't lease its vehicles in the traditional sense of the term.

3. If you must have a car or are saving up for a new car, but can't afford the down payment or monthly payment on a new car.
This last one is a bit trickier, but if you absolutely need a car for your job and/or are saving up for a new vehicle, but you can't yet afford the down payments or monthly payments associated with purchasing a new vehicle, then leasing may be the right option for you.

On top of the aforementioned lower upfront costs to lease a vehicle and the expectation that repair costs would be minimal since many would be covered by the manufacturer's warranty, monthly lease payments are also significantly lower than purchasing a car outright. According to statistics from automotive research company, the average monthly auto loan payment in mid-2013 was $464, compared with just $418 for the average monthly lease payment -- the widest gap since Edmunds started tracking these number in 2003. This difference could allow lessees enough time to save up money for a down payment on a new car when their leases are up.

Another point worth noting here is that just like purchasing a car, leases also have negotiable price points, often resulting in little, to perhaps even zero, money down. In other words, consumers who need a car but don't have the money to afford a down payment on a new car could reasonably negotiate a reduced down payment and low monthly payments, further helping their financial situations.

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Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2014, at 6:57 PM, fishdoc2 wrote:

    Ok, whoever wrote this has no idea what they are talking about.

    I'll make a couple of points for anyone reading this garbage to chew on.

    1) " IF" leasing is such a bad idea why is it only available to people with good credit?

    2) Cars are not investments.. You do not buy things that depreciate, you buy things that appreciate.

    There are pro's and con's to both buying and leasing but the simple fact is the average American trades their car every 3 to 5 years. Why you would want to make a buy payment when you're going to dump the car in a few years is beyond me.

    Sit down and factor in how much money you're going to have to put down to cover the depreciation so you're not upside down, the taxes, your payments, etc etc and trade your car in 3 years and add up how much money you spent to drive the car. Now do a true sign and drive lease and add up the same car to drive it for 3 years.. Just for fun see which one is cheaper..

  • Report this Comment On January 19, 2014, at 6:42 AM, MelodicAgony wrote:

    I agree with fishdoc2. This article is misinforming.

    Leases have become so inexpensive that the sum of the lease payments is sometimes less than the depreciation in the same period.

  • Report this Comment On January 19, 2014, at 9:20 PM, Nearside6618 wrote:

    If the average age of the cars on the road in the US is 11 years old the "average American" DOES NOT "trade in their car every 3 to 5 years".

  • Report this Comment On January 20, 2014, at 12:34 PM, Curmudgeon1973 wrote:

    Leasing also provides "off-balance accountability" when calculating debt/income ratios. Leasing allows you to postpone the buying decision to the end of the contract. Leasing companies usually carry 10-20,000,000 liability umbrellas while requiring the customer only provide the first 500k. In and out in 2-3 years keeps fresh equipment in your driveway, minimizing the risk of expensive repairs.

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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