The 5 Pitfalls of Leasing a Car

Practically everywhere you look within the auto industry at the moment, you're likely to see green arrows as sales of cars and light trucks in the U.S. zoomed higher by 7.6% in 2013 to 15.6 million units, the highest totals we've witnessed since 2007.

What's truly impressive is that domestic and overseas car manufacturers are finding success in U.S. markets right alongside used-car retailers. In other words, the appetite for vehicles in this country is nearly insatiable, thanks in large part to historically low lending rates, which makes financing a new car or truck very attractive.

Source: Brian Teutsch, Flickr.

But this particular car boom has created its own unique trait -- a dramatic rise in the number of Americans choosing to lease their next vehicle. As noted midway through last year, the gap between the average monthly price paid for a new car and a leased car is at its widest point since Edmunds began keeping records in 2003. You might say that the dangling carrot to entice cost-conscious consumers to lease is bigger and juicier looking than ever. However, there are a number of pitfalls to leasing that many consumers simply don't consider.

This isn't to say that leasing a car is the wrong option 100% of the time, as yesterday we looked at three unique situations where leasing a car makes total sense. Yet in most cases, leasing could be a decision you'll regret later. Here are the five most prominent pitfalls of leasing a car:

1. You'll have no equity built up in the vehicle.
There is perhaps no bigger pitfall to leasing a car, truck, or SUV than the fact that when your lease term ends you have built up absolutely no equity in the vehicle. You can choose to purchase the vehicle at a pre-determined price point when your lease was written, but the purchase price, when combined with the down payment and monthly payments over the life of that lease, is almost always more than the price of simply purchasing the vehicle in the first place. For lack of a better phrase, a leased vehicle is akin to a glorified new rental car that you get to keep for a pre-determined amount of time but ultimately don't own and must return in good shape.

2. Long-term leasing costs are often greater than purchasing a new car.
The irony of leasing a vehicle is that while the down payment and monthly payment costs will probably run cheaper during the first two years when compared with purchasing a car, truck, or SUV outright, the long-term costs of leasing a vehicle will more than outweigh the cost of simply purchasing that same vehicle. The reasoning is that lessees either get stuck in a repeating lease pattern where they have no equity built up in any automobiles they're leasing, or they decide to purchase their leased vehicle at a substantial premium to its original MSRP. Either way, the allure of a lease begins to wane quickly after the second year.

Source: Christopher Ziemnowicz, Wikimedia Commons.

3. You're still responsible for normal wear-and-tear repairs.
While leasing has the advantage of a smaller comparable down payment relative to buying a vehicle, and puts you behind the wheel of a new vehicle that probably comes with fewer mechanical issues, normal wear-and-tear maintenance and other problems that arise that are outside of the manufacturer's warranty are the responsibility of the lessees. This could mean that fluid changes as well as brake pad replacement and rotor refinishing could be the lessees' responsibility even though they have no true long-term ownership of the vehicle.

4. There are limits on what you can do with your leased vehicle.
If there was any denying that you're limited in what you can do with your leased vehicle, lease contracts generally limit the number of miles you're allowed to put on the vehicle to what usually equates out to roughly 12,000 miles per year. Lease contracts also don't allow any permanent customization to be done to the car. If you go over your allotted mileage limit, you could be staring down overage fees totaling $0.15 to $0.25 per mile and could be required to pay additional fees if you've made modifications to your car that are deemed permanent when your lease term ends. And for those of you with the smart idea of returning the car early before it goes over its allotted mileage, think again, because there are fees for early termination of a lease agreement.

5. Insurance costs for leased vehicles are often higher than purchased vehicles.
Finally, keep in mind that while the down payment and monthly payment on a leased vehicle are going to be less than outright purchasing a car, your insurance company may very well ding you for that choice since you'll have absolutely no equity built up in the vehicle. In fact, insurance costs on a leased car will often be higher than if you just purchased the same vehicle in the first place.

Would you like to know the secret to saving thousands on your next car purchase ... for free?
You don't know it yet, but you probably spent thousands more than you should have on your vehicle. In fact, the auto industry can be such a dangerous place for consumers that our top auto experts are determined to even the playing field. That's why they created a brand-new free report on The Car Buying Secrets You Must Know. The advice inside could save you thousands of dollars on your next car, so be sure to read this report while it lasts. Your conscience, and your wallet, will thank you. Click here now for instant access.

Read/Post Comments (4) | Recommend This Article (5)

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 20, 2014, at 7:25 AM, Riggerwo wrote:

    But this is how people who do not qualify for a big auto loan can get a fancy car and "still keep up with the jones's" for less money up front...sad really!

  • Report this Comment On January 20, 2014, at 1:16 PM, dew4110 wrote:

    Insurance requirements in Texas are the same whether the vehicle is a lease or a purchase.

    Milelage limits are determined at the lease inception and yaes if you go over them it will cost you. It is the same as if you purchase a vehicle too because the excess mileage lowers the value of the vehicle at trade in.

    You are responsible for repairs on a vehicle you purchase too aren't you Sean? Or do you just drive it till it falls apart?

    As far as equity goes, have you ever tarded in a vehicle that you still owed money on? Do you ever have "equity"?

    What if you purchase a vehicle that is not as fuel efficient as most and the economy goes bad and fuel prices rise three years after you sign the papers. What does that do to the value of your vehicle? It takes a nosedive and is worth even less and you are buried in a vehicle that is destroying your budget. Now if you had leased that vehicle for 39 months you would have a guaranted valus at the end of 39 months and you would just walk away and get the more fuel efficient vehicle to take into the next three years.

  • Report this Comment On January 20, 2014, at 10:15 PM, Eddiesmack wrote:

    Poorly researched/thought out article. Lease depreciating assets, buy appreciating assets.

    1) You don't have "equity" built up in a vehicle the first couple of years anyway. If you finance, you're upside down on the loan, if you paid cash then pray you don't get in a wreck where the car is totaled because the insurance won't pay what you paid for the car. Leases typically include GAP insurance to cover the vehicle in case it is totaled. Purchasing a car only makes sense if you plan to hold it 6+ years, then you can make a solid equity argument. You always have the option to purchase the car at the end of the lease, for a fixed amount that is negotiated up front, so really it's no different than financing the car short term and then paying it off cash after a couple of years if it turns out to be a good car that you want to keep.

    2) It's hard to know where to start with this claim since it's so off base. Again, it only makes sense to purchase if you plan to keep and hold 6+ years. Otherwise you can argue that leasing is cheaper - for instance, you get a new set of tires every couple of years and new warranty that covers you, whereas a 5 or 6 year old car will be out of warranty and have maintenance costs that a newer leased car won't have

    3) So it's a wash, no difference between lease and purchase. Except as I mentioned in #2, with a lease you have a new car that is less likely to need maintenance and that is under warranty the entire time, so slight advantage to leasing

    4) There are limits to what you can do to a purchased car as well, unless you don't care about destroying its value. Car re-sale and trade values decline the more miles you put on the car, the more modifications you make, etc. Why do you think leases have the restrictions in the first place?

    5) There are places where this is irrelevant. Even in places where it's true, the cost is sometimes so small that it's hardly worth mentioning. Oh and he fails to mention that in many of these places where insurance is higher to lease, you offset that by not paying sales tax on the entire cost of the car (just on the lease amount)

  • Report this Comment On January 21, 2014, at 11:31 AM, Gene51547 wrote:

    Most people will agree with the fact of never buying anything that depreciates. You made comment about a down payment, to have a comparable payment purchase finance VS leasing you would need significantly more money up front. And instead of a typical 3 year lease you would need 5 year of finance. And if you were to buy the vehicle at lease end, even adding up all your payments and front monies VS financing for 5 years with a lot of money up front to have a reasonable payment. The difference depending on the vehicle of course, is somewhere between $1000 to $2000 for that difference it may make sense to lease it if you truly love the vehicle buy it at lease end, if not walk away. Where as when you buy it and hate it, not so easy to walk away without taking a big financial hit. As was said earlier you drive more miles you buy more miles up front. trade in a car with more miles your vehicle is worth less. Also lease minimal maintenance by the time anything heavy is needed car is being returned. Also that very high down payment that would have be needed to have a similar payment would be in the bank (investment making you the money that your depreciating car never would have. And finally you always in a new car with latest of technology and safety features. Happy motoring

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2800318, ~/Articles/ArticleHandler.aspx, 8/31/2015 3:51:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated Moments ago Sponsored by:
DOW 16,539.32 -103.69 -0.62%
S&P 500 1,974.01 -14.86 -0.75%
NASD 4,776.91 -51.42 -1.06%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes