Cars don't last forever. It's true that the average age of cars on the road has been rising over the past decade, recently hitting 11.4 years, but even if you manage to hang on to your cars for 15 years each, you're likely to need to replace your vehicle at least four times in your life. These days, it's common to wonder whether buying a new car or leasing a car is the smartest move.
Leasing a car: advantages
There are clear upsides to leasing a car.
- For one thing, leases typically last about three years, so you can replace your set of wheels with a brand-new vehicle relatively frequently. If you're doing so, that means you're usually driving a very young car, which is likely to need few repairs and little maintenance. Indeed, it's likely to remain under warranty for most or all of the lease term, though you may still be responsible for paying for items such as new tires.
- Leasing can make sense if you only plan to own a car for a few years. It can be more cost-effective to lease a new car for several years than to buy a new car and then sell it after a few years, as new cars tend to depreciate rapidly. Leasing can also be less expensive if you're thinking of taking out a car loan for a new car, and then selling or trading in the car before the loan is repaid.
- Leasing can allow you to drive a nicer car than you can really afford -- though it might still not be a great financial move.
- If you're self-employed and use your car for business, you may be able to deduct the expense of your monthly lease payments.
Leasing a car: drawbacks
There are plenty of reasons to reconsider leasing a car:
You're renting, not owning: Think about your home: Would you rather rent it or own it? Renting is not crazy and often makes sense, but by taking out a mortgage on your home, you can build equity in it, with your monthly checks toward shelter helping you eventually own a valuable asset. When leasing a car, you're essentially renting it, with no ownership to show for it at the end of the term, and therefore no trade-in value available. You'll also have endless lease payments to make if you plan to keep leasing, turning in cars and leasing new ones every few years.
Less freedom: Lease agreements will typically limit you to a certain number of miles you can drive – often 12,000 to 15,000 per year -- without being charged extra. (At $0.15 to $0.25 per extra mile, each extra 1,000 miles you drive can cost you $150 to $250.) If you get a new job that involves a longer commute, you might be in trouble. If you just want to drive across the country on a vacation, that might present issues, too. If you lose your job and want out of the lease, you're stuck. If you owned your car, you could just sell it to generate some needed cash. But with a leased car, you're on the hook to make payments on it, and if you want out of the lease, you'll probably have to pay an early termination fee.
- Extra insurance: You'll have to carry auto insurance on a leased car just as on a purchased car, but you might also need to have Guaranteed Auto Protection (GAP) insurance, covering the difference between the value of the car and what you still owe on the car. Without it, if the car is totaled or stolen, you might owe more to your lender than your primary insurance will pay.
Extra costs: When you return a leased car at the end of your contract, you'll be on the hook to pay for any minor damage to it, such as dents and scratches. If you haven't maintained the car well, you can be charged extra. Depending on your state, you might face hefty sales taxes on the full value of the leased car. (Most states only tax your monthly payments, though.) If you fall in love with your leased car and want to buy it at the end of the lease, it will end up costing you more than if you'd just bought it outright at first.
- Credit: If your credit rating and credit score are poor, you'll likely face steeper leasing costs, as well as steeper interest rates should you prefer a car loan to buy the vehicle. You might be best off buying with cash, or buying a used car with cash.
The bottom line is that if you can own the same car for many years, leasing it rarely makes financial sense. Buying a new car is costly, but once you pay off any loan you might have taken out, it's yours, potentially for a long time. Choose a car that has a great reputation for reliability and longevity, and you'll be even better off. Another savvy option is buying a used car. Even a car one or two years old can save you a lot.
Tips for leasing a car
If you really want to lease a car, though, or have determined that it makes sense financially to do so, go about it in a smart way. Here are some tips:
Don't tell a car dealer you plan to lease until after you've negotiated the car's purchase price. The lease is based on a certain value of the car, so negotiating a lower value to start can be a big money-saver.
Be careful if you're offered the chance to take over someone's car lease. That might violate the terms of the contract and not be allowed.
Look into financing a lease through an entity other than the dealer. You might get a good deal from AAA or a credit union, for example. Leases from car makers can be relatively good deals, too, though.
Read up on leasing and learn the lingo, so you're not hoodwinked by a salesperson. Learn the dealer's true cost for the vehicle and what it's really likely to be worth at the end of the term. Read the fine print in the contract so you fully understand what you will and won't be expected to pay. And factor local taxes and insurance costs into your decision, too.
It can be tempting to be able to lease a new car every few years, but don't blindly believe dealers who tell you you're getting a bargain. For many, if not most of us, leasing a car is rarely the best financial decision.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.