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Leasing a Car Foolishly

Most Fools are aware of the pitfalls of leasing a car. Your monthly payments don't build any equity, there are lots of restrictions, you may have to carry extra insurance, and extra wear and tear on the car will cost you dearly when you give it back. Clearly, for many Fools, leasing just doesn't make sense: As I pointed out a few days ago, buying a nice two- or three-year-old used car and keeping it until it's old and tired is the most cost-effective way to go for the average Fool.

But not everyone can do that. If you're a real-estate agent who regularly chauffeurs clients, for instance, a tired old car might be a significant professional liability. And, of course, if you're someone who just has to have the latest features, and you're willing to pay for them with your eyes open, leasing can be a cost-effective way to do that. In addition, many big automakers, including Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and Toyota Motor (NYSE: TM  ) , offer some incentives on leasing as well as on new-car purchases.

If you're thinking of leasing, here are some considerations:

  • Can you really stay under the mileage limits? Leases limit the number of miles you can put on the car in a year. These limits usually range from 12,000 to 15,000 miles, but they can be as low as 10,000, and you'll pay a hefty fee if you exceed them. Figure out how many miles you've put on your current car(s) over the last few years, and be realistic -- and leave a margin of error.
  • Will you be happy keeping the car for the full term of the lease? And are you sure you'll be able to afford it? Early-termination penalties can be brutal, often costing almost as much as it would have cost you to stay the course.
  • Do you treat your cars well? As with excessive mileage, "wear and tear" will cost you. If your leased beast will sleep outside under a white pine that drops sap in the summer and branches in the winter, clearly you'll want to rethink the leasing thing. But "wear and tear" can be something as simple as scuffing from rock chips or a bicycle rack. If your lifestyle includes lots of roof-mounted accessories, off-road adventures, or young kids, think carefully before leasing -- or expect to pay up at the end, and budget accordingly.
  • Have you budgeted for the extra costs beyond that "low monthly payment"? Sure, when you're leasing, you generally save on the down payment -- and in some states, you may pay lower taxes than you would on a car you owned. But leasing has its own costs, beyond the monthly payment and any penalties for excessive wear and mileage. You may be charged an up-front fee to initiate the lease, and another fee at the end of the term -- even if you return the car in perfect shape. Additionally, you may be required to (or want to) carry extra insurance, which will drive up your ongoing costs. Factor these into your budget before you sign.
  • Do you need to modify the vehicle in any permanent way? I'm not talking about superchargers and hood scoops -- if those are your thing, you're probably going to buy anyway. Leases generally prohibit permanent modifications of any kind, which can include everyday modifications like aftermarket stereo systems and some types of trailer hitches. Make sure anything you plan to do with your leased car is reversible, or at least allowed under the terms of your lease agreement. If it isn't, it may count as "wear and tear" and cost you a bundle at the end.

Whether the vehicle of your dreams is a new hybrid SUV, a Nissan Maxima sedan, or a sporty Honda S2000, leasing can help you save money while keeping the contents of your garage fresh -- as long as you follow the rules.

Looking for more common-sense tips that will help you make the most of your finances? Check out theMotley Fool Green Light newsletter, where Fools Dayana Yochim and Shannon Zimmerman offer up hundreds of dollars of money-saving tips every month. Help yourself to their best ideas -- they're free for 30 days.

Fool contributor and car nut John Rosevear doesn't own any of the stocks mentioned above. The Motley Fool has a disclosure policy.

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John Rosevear

John Rosevear is the senior auto specialist for John has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007.

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