Pros And Cons Of Leasing A Car: Is Leasing A Car Right For You?
Before leasing a car, it’s important to evaluate the pros and cons of leasing a car.
Leasing a car can be a bit trickier than purchasing a car due to the unique structure of car leases. While leasing is generally more affordable than buying, there are more contractual obligations to consider when leasing a car.
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While there are negatives of leasing a car, there are also benefits of leasing a car. We hope this article will help you decide which option works best for you.
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How Does Leasing A Car Work?
The main difference between leasing and buying is that when you buy a car using a loan, you are making payments toward your eventual ownership of the car, and it becomes yours once the loan is paid in full.
With a car lease, you are basically paying to drive the car for a short-term. When the term or duration of the lease period ends, the vehicle must be returned to the leasing company or it may be purchased for its residual value.
Whether you get your leased car loan from a credit union, bank, or car manufacturer, the monthly loan payments are mainly calculated based on vehicle depreciation — the difference between the value of the car when it’s new and what the lender anticipates its value will be at the end of the lease term.
Compared to buying a new car, leasing a car can be an attractive option for drivers who:
- Don't drive a lot. Leases require that you choose a mileage plan. Going over the miles in your selected plan can result in penalty fees.
- Want to drive a newer/nicer car. Because car leases are short-term (2-4 years), drivers can continually be in a new vehicle, whereas when you purchase a vehicle it will eventually need costly repairs.
- Want to keep their monthly payments low. The short-term nature of a car lease generally means lower monthly payments than with a vehicle purchase.
For more details check out
How Does Leasing a Car Work and is it Ever Worth it?
Advantages Of Leasing A Car
Leasing is a great option for people who need a vehicle on a short-term basis, don’t care to own a car, and can adhere to the mileage limit that is a key part of car leasing.
The benefits of leasing a car include:
Lower Monthly Payments. Car lease payments are based on a money factor (the cost of financing the car), the cost of depreciation, and the residual value the car will have at the end of the lease term. These lease costs are generally less than the monthly payments required on a new purchased car, for which you pay principal and interest on the financed loan amount.
Lower Down Payment. Because the lease term is short (two to four years), most leases can (and should) be done with a low down payment because your money down is not going toward building equity (or ownership) of the vehicle. A lower down payment will only reduce your monthly payment.
Minimal Repair Costs. Because a car lease is for a short-term, usually 2-4 years, you won’t be paying for high-cost repairs that are typically needed the older the car gets.
You Get To Drive A New Car. The fee structure of a car lease combined with dealer incentives means that high-end and luxury cars are more affordable. Plus, if you like to always drive a new car then the short lease term works in your favor.
Option To Buy Car At The End Of The Lease. At the end of a lease, you’ll have the option to purchase the car. If you decide to purchase, the leasing company will typically waive the “disposition fee,” which is the fee that many loan companies collect for the work they have to do to the car (such as clean and make repairs) before they can resell it.
Includes GAP Insurance. A leased vehicle
may or may not include GAP insurance, so be sure to carefully read the lease contract to see if it is. GAP (Guaranteed Auto Protection) insurance covers the difference (or gap) between the amount you owe on your auto loan and what your insurance pays if your vehicle is stolen, damaged, or totaled. Gap insurance is sometimes required when buying or leasing a vehicle. The
Consumer Financial Protection Bureau warns consumers that it is highly unusual for a lender to require that you buy GAP insurance.
No Need To Worry About Depreciation. Because you will return the car at the end of the lease term you won’t have to deal with making repairs that typically are needed on older cars.
Tax Benefits. According to
IRS.gov, if you lease a car you use in business, you may not deduct both lease costs and the standard mileage rate.
You may either:
Deduct the standard mileage rate for the business miles driven. If you choose this method, you must use the standard mileage rate method for the entire lease period (including renewals).
Claim actual expenses, which would include lease payments. If you choose this method, only the business-related portion of the lease payment is deductible.
Disadvantages Of Leasing A Car
Some drawbacks of leasing a car include:
Expensive Over The Long Term. There are cost differences associated with leasing vs. buying a car, which will be influenced by a variety of factors including the length of an auto loan or a lease, the amount of money you put down, the interest rate you qualify for, and the value of the car. If you are not sure if you should buy or lease, talk to your dealership sales representative about purchase promotions vs. lease promotions and ask for an “out the door” price for both options on the same vehicle.
Limited Mileage. All lease agreements include an annual mileage allowance or limit — such as 10,000, 12,000, or 15,000 miles. If the annual allowance is exceeded during the lease term, you will have to pay a penalty fee (typically $0.15 to $0.30 per mile).
Driving more miles reduces the value of the vehicle and the leasing company charges a fee to cover that loss. The solution: be sure to select the mileage option that reflects your driving habits.
Difficult To Cancel.
Returning a vehicle early could result in a penalty fee, so make sure to read your lease agreement carefully. Voluntary termination means that you choose to end your lease before its scheduled termination. Most leases give you the option of ending your lease early. You may turn in the vehicle, pay the balance due (including any associated early termination and other costs), and end the lease. Some leases permit you to terminate early only if you purchase the vehicle.
Requires Great Credit. According to
Experian data, the average credit score for a car lease in the second quarter of 2020 was 729. But don’t worry if you have less than perfect credit. Credit unions, banks, and car manufacturers all provide auto lease loans and each lender has its own criteria on which they qualify a borrower for a loan. The minimum required score may vary depending on the lender you talk to. For more information, read “
What Credit Score is Needed to Lease a Car?”
Fees And Penalties. Leasing comes with many conditions, and if the conditions aren’t met, there are fees and penalties that must be paid, including excessive wear and tear, going over the allotted mileage limit, and early termination fees if you want to break the lease early.
Modifications May Not Be Allowed. Because a leased car belongs to the leasing company, there are restrictions to modifying or customizing it, such as adding heavily tinted windows. If there are specific customized options you’d like, discuss these with the dealer before you sign the lease agreement.
Higher Insurance Rates. According to GEICO, leasing a car usually requires a higher insurance premium, because the leasing company technically owns the car in full and wants to make sure the car is well covered in case of an accident. When financing a car, the finance company requires insurance, too, but the baseline coverage needs won’t be as high.
Can't Build Equity. Although all vehicles will depreciate in value, a purchased vehicle is yours to keep or sell, which means you have equity to put toward another vehicle. Leasing a vehicle means making monthly payments for the use of the vehicle. At the end of the lease term you do not take ownership, you return the vehicle. Therefore you do not build equity with a lease.
You Don't Own The Car At The End Of The Lease. Leasing is designed to be a short-term option for having use of a vehicle. However, there is the option to purchase the car at the end of the lease term but it may not be equitable to do so. You’ll need to do the math and decide which option is best.
Is Leasing A Car Right For Me?
While there are pros and cons of leasing a car, there are also
pros and cons of buying a new car.
While it’s exciting to purchase a car and think of it as your own, the truth is, if you are purchasing a car with a loan, then you don’t actually own it until the loan is fully paid. During this time, the car will depreciate and then you own an older car that is less valuable. However, a car paid in full is an asset that can be used as collateral for attaining other loans, or sold, or traded-in.
Many people prefer to lease because leasing allows them to have a brand new car at the end of every lease term (generally two to three years), and there’s no need to worry about big repairs or maintenance costs. Due to the cost structure, leasing generally has lower monthly payments which is why many people are able to lease a luxury car that wouldn’t be affordable as a purchase. These are some of the main advantages of leasing a car.
Leasing is a good option if you don’t have a lot of money saved for a down payment on a car purchase or you’re not really sure what make and model car you want to own. In this case, leasing is a good interim option.
To learn more read, "
Is Leasing A Car Worth It?” and “
Pros and Cons of Leasing Vs. Buying a Car.”
CU SoCal Auto Loans
If leasing isn’t right for you and you decide on purchasing a new or used car, CU SoCal can help with
car loan financing! We offer:
- Up to 120% financing for new and used vehicles.
- Rates as low as 2.89%APR.
- Quick pre-approvals.
- Extended terms up to 84 months for the lowest possible monthly payment.
- A personal auto-buying concierge service.
- Low-cost loan protection add-ons.
- No application or funding fees.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our auto loan experts.
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