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.
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 Edmunds.com, 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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Fool contributor Sean Williams is short shares of Tesla Motors, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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