The Ins and Outs of Leasing a Car

Auto leasing has been growing in popularity with around 30% of new cars being leased as of June 2018 versus 22% in 2012. For luxury cars, the leasing percentage is closer to half. In fact, the Audi A6 is the most leased car at 78% according to Cartelligent.

Essentially, when you lease, you are paying a portion of the car’s value—the depreciation of the vehicle during the time that you drive it, plus a finance charge and an assortment of fees. There are both negotiable and non-negotiable expenses associated with leasing a car too, so it is important to do your homework.

The price of the car should be negotiated in the same way you would if you were buying the car. You will also need to be aware of the car’s residual value—what it will be worth at the end of the lease—because this determines the depreciated amount that is the basis for your lease payment. For this reason, it is a good idea to lease a car that holds its value and to start a lease toward the beginning of the model year.

Another negotiable expense is the down payment. You should try to avoid paying this because you will lose this money if the car is stolen or totaled. Gap coverage, which is insurance that covers the difference between what you owe on your lease and what the car is actually worth in case of theft or damage, won’t reimburse your down payment. Also try to avoid paying a security deposit since it’s easier for the leasing company to charge exaggerated wear and tear when they already have your money.

The Pros of Leasing

• You may have a lower monthly payment than you would if you bought the car.
• A car’s warranty is usually still in effect during the leasing period, so you won’t be responsible for any major repairs on the vehicle. Some leases may even include oil changes.
• Over the course of a lease, let’s say it’s 36 months, the cost of leasing is likely to be less than the cost of buying.
• A lease contract usually includes gap coverage so if your car were to be totaled in an accident or stolen, you would be covered. If you bought the car and totaled it six months later, you would likely owe more on the car than insurance would pay out. Be sure that your lease contract includes gap insurance.
• If you own a business, you can deduct your lease payments on your tax return.

The Cons of Leasing

• You have no equity in the car.
• You will pay between $500 and $1500 in fees that are specific to car leases. The first is an acquisition fee to the leasing company to set up the lease and the second is a disposition fee to cover the cost of reselling the car.
• You will be paying sales tax on the finance charge as well as the lease amount.
• If you live in Georgia, Illinois, Minnesota, New York, Ohio or Texas, you will pay sales tax on the entire purchase price of the car, not just the depreciated leased amount.
• Most leases allow for 12,000 to 15,000 miles per year. After that, you are penalized for excess mileage (usually 10 to 15 cents per mile!). However, this is a negotiable point and many leasing companies will allow you to buy additional miles for about 5 cents.
• If you are rough on cars, you may be responsible for paying for excess wear and tear.

What if I Want to Buy the Car at Lease End?

This is where the residual value of the car comes into play again. This is the amount that the car is supposed to be worth when your lease ends. However, sometimes the actual market value can be either considerably lower or even considerably higher. If the market value is considerably lower than the residual value, you should be able to negotiate a better purchase price from the leasing company if you really want the car, but you should probably walk away. On the other hand, if the market value is considerably above the residual value, you may want to consider purchasing the vehicle.

The Bottom Line

If you are looking to buy a new car every three years, leasing may be a better option for you compared to the alternative of a five-year car loan. Depending on the vehicle, you may owe more on your loan at the end of three years than the car is worth. Otherwise, unless you are accident-prone, the long-term cost of leasing is always greater than the cost of buying if you continue to drive the car after the loan is paid off.