Leasing is right for some people, not good for others. Here's more details:
The Advantages
Low Down Payments -- Even though a lot of the advertised lease deals assume a down payment, you can often get the dealer to limit it just by asking. Of course, the more cash you come up with initially, the lower your monthly payments.
Low Monthly Payments -- Since you are only paying off the depreciation on the car -- not its full value -- your monthly payments are much lower than if you opt to finance the purchase of the entire car over the same period of time.
Easy Turnover -- Assuming your car is in good shape, when your two or four years are up, just stroll into the dealer, hand over the keys, and drive out with a brand new car and a new lease arrangement. You don't have to bother with selling the car or haggling with a dealer over trade-in value. That was all taken care of beforehand.
Bigger Tax Write-Offs -- If you are deducting a portion of your car's depreciation from your taxes, you will be able to deduct substantially more if you lease.
The Disadvantages
No Equity -- Similar to paying rent on an apartment, your lease payments don't go towards owning anything. Unlike traditional financing, you can't look forward to the day when the payments will stop and you can drive your own car free and clear.
Lack of Flexibility -- You pay a big penalty if you want out of the lease before the full two or four-year term. Bailing out early may cost you as much as six extra months of payments, depending on your leasing company.
You May Pay Extra -- Most leases charge an extra 12 or 15 cents for each mile you drive over a certain limit. Typically the lease agreement grants 15,000 miles per year. Also, you'll have to pay up for any damage to the car beyond normal wear and tear when you turn it in. One way to avoid the mileage charge is to buy more miles at a reduced rate up front.
Insurance May Come Up Short -- If you total the car or it gets stolen, your insurance will only reimburse you for the car's market value, which might not cover what you still owe on your lease. You can buy extra "gap coverage" to protect against this, and some lease deals include it automatically.
Seven Questions You Should Ask Yourself
1. Do you need your cash?
If so, leasing makes sense, because usually you will put less money down than if you buy. In many cases, dealers will waive a down payment. You need only come up with $1,000 to $2,000 for fees, the first month's payment, and a refundable security deposit. Sales tax is usually paid monthly as part of the payment. Dealers often will allow you to roll many of the fees into the monthly payment as well by adding them to the price you pay for the car. If you buy a car and finance it, you could easily have to put 10% of the purchase price down as well as 6% to 8% sales tax -- perhaps $9,000 on a $50,000 car. You are building up equity, but current cash needs may be more pressing.
2. How often do you want a new car?
Leasing is attractive for people who want new wheels every three years or so. It saves you the hassle of selling your cars, and allows you to move from car to car with relatively steady low monthly outlays and low down payments. But don't lease if you like to buy a new car every year. Ditto if you like to buy one every seven or eight years. A purchase allows you to either buy a new car impulsively when you have a cash windfall or to forestall a purchase, nursing your old car along, if your income drops. With a lease, you lose a good deal of control over those decisions. If you foresee owning the same car for seven years or more, you'll save money by buying. That's because with a lease, you walk away from a car just when depreciation slows and -- under long-term financing -- equity begins to build.
3. How much do you drive?
Check your odometer. It's been keeping track of your driving habits for you. The ideal lease customer drives 15,000 miles a year and maintains a car in good condition.
