Purchasing a new vehicle can be an extremely stressful event. Comparing makes and models, choosing options and features, dealing with overanxious salespeople, and negotiating a good price can turn something pleasurable into something that feels like drudgery. After deciding on a car, working with a salesperson, and determining a reasonable price, there is one more decision that is required; should the vehicle be purchased or leased?
When a vehicle is leased, monthly payments need to be made for the entire life of the contract; leasing is similar to renting. These monthly payments are made up of the interest rate of the lease and the depreciation of the value of the car. One of the principle benefits of leasing a car is that the out-of-pocket costs are considerably less than when purchasing the same vehicle. The down payment is usually minimal and there is no upfront sales tax when you lease. Other benefits of leasing are smaller monthly payments, lower maintenance costs, and the capability of driving a new car every few years.
However, before deciding that leasing is the best option it is essential to understand that there are some important drawbacks to leasing a vehicle. It is advisable to know the disadvantages of leasing before making that final decision on how to finance the new car. Knowing both the advantages and the disadvantages will make for a more informed financial decision.
Early Termination
If a lease is terminated early, it can be quite costly. There may be an early termination fee in the contract so it is advisable to read the lease carefully. In most leases, the earlier the lease is terminated, the higher the charge will be. If the early termination is due to a stolen or totaled car, the insurance payout may be less than the remaining balance on the lease. This extra money that remains due will still need to get paid. Most lease companies offer gap insurance for an extra fee. This gap insurance will cover some or all of this difference and is a recommended upgrade.
Insurance Cost
Leasing companies often require the driver to carry higher amounts of insurance than the minimum required in a particular state. It is advisable to learn about the minimum requirements and to get an estimate of insurance costs. Knowing the numbers before entering into a lease will prevent any costly surprises after the lease has been signed.
Mileage Limitations
The vast majority of leases have yearly mileage limits on a leased vehicle. The most common mileage limit is 15,000 miles (12,000 miles is also a common amount). If a driver goes over these limits during the year, they will have to pay extra. Fees for going over the limits range from 15 cents per mile up to 25 cents per mile for luxury cars. These extra fees will add up quickly; going over by 5000 miles can cost over $700 at the end of the lease.
Credit History
Finance companies sometimes will require a higher credit score than with conventional loans. Anyone who has a less than stellar credit score may want to consider purchasing rather than leasing.
Surprises in the Contract
Prior to signing the lease agreement, it is important to read it carefully. Many lease agreements have provisions for additional fees if there is “excessive wear and tear.” There may be other provisions in a lease contract and it is vital to read the contract thoroughly before signing to avoid any surprises at the end of the lease. Gary Worthington, an account executive with Crevier Sales and Leasing Inc in Santa Ana, CA warns everyone, “Understand what you are signing before you sign!”
No Ownership or Equity
Leasing a vehicle is similar to renting a residence. Monthly payments are due for the life of the contract. Equity does not build up and the vehicle is considered a liability instead of an asset. It is possible to purchase the vehicle at the end of the lease, but by this time it has depreciated significantly and is more costly than if it had been purchased initially.
The Long-Term Cost
In the long run, the vehicle will cost more if leased. If having to pay less up-front and smaller monthly payments are desired, leasing is the right choice. Dave Ramsey of Townhall.com pulls no punches when he says about leasing, “It’s the most expensive way to operate a vehicle.” If long-term cost is the main objective, the leasing is not the best alternative.
Though there are plenty of zero-percent and low-rate financing options for consumers, more than 20 percent of all new cars are leased. Leasing remains a popular option for new car buyers who find it difficult to afford a new car purchase. Before leasing, make sure to know the details of the contract; the initial outlay of cash, the monthly payments, the length of the lease, the mileage limitations, how much insurance is required, and any possible additional charges at the conclusion of the lease.
Fred Phillips - I am a small business owner, husband and father. My business does court research, business verifications, asset verifications, and more. I ...
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