No question about it: leasing has some advantages over buying. For one thing, you usually don't have to come up with as large a down payment when you lease. With the price of the typical new car these days, the usual 20% down payment can amount to a hefty sum. And, if you're in the market for really expensive machinery in the $50,000 to $100,000 range, you're looking at tying up $10,000 to $20,000 in cash just for the down payment. Aside from the difficulty of coming up with substantial cash to put down, some people don't want to pull their cash resources out of particularly lucrative investments to buy a car.
But perhaps the biggest advantage of leasing is that your monthly payments will be lower than if you take out a loan. Here's why: When you buy a $30,000 car, for instance, you make loan payments based on that price (minus the down payment). But when you lease, the payments are lower because the car won't be yours when the lease is up. In other words, you'll only pay for part of the car. A $30,000 car might still be worth $14,000 at the end of a 36-month lease. So the leasing company would base your monthly payments on the depreciated $16,000, not the entire $30,000.
By the same reasoning, you may be able to drive a more expensive leased car than you could afford to buy with a loan. Because you're not paying for the whole car with a lease but only on the depreciated amount, the monthly lease payment on a $40,000 car could well be the same as a monthly loan payment on a $30,000 car. Yet another advantage is that at the end of a closed-end lease contract you can walk away from the car and let the leasing company have the headache of reselling it. If you like to drive a new car every two, three or four years, trading in one leased car for another is very easy.
In some states, you may be able to save on sales taxes with a leased car. When you buy a car, you'll pay a sales tax on the entire sales price upfront. But when you lease, you'll pay a sales tax on each monthly payment. And, because as we've said before, you'll be making payments only on the depreciated portion of the car, you'll pay sales tax only on the depreciated portion rather than the entire value of the car.
If you use your car for business, you may also be able to deduct more from your taxes on a leased car. When you lease a car and use it only for business, you can write off nearly the entire amount of the lease payment, even on high-priced cars. By contrast, when you buy a car, there are limits on how much you can write off each year. On high-priced cars, it can take eight, ten or more years to fully depreciate the car for tax purposes. A leased car, especially one with a price tag of $20,000 or more, can give you more sizable tax deductions if your car is a legitimate business deduction. (But please consult a knowledgeable tax accountant.)
For example, let's say you purchase a $35,000 car and use it exclusively for business. The government will allow you take a maximum of $3,060 in depreciation for the first year of service, $4,900 for the second year, $2,950 for the third year and $1,775 for the fourth year and every year thereafter until the car is fully depreciated. If you keep the car for four years, you'll be allowed a total of $12,685 in depreciation. (Visit irs.gov for the most recent depreciation tables.) But if you lease the same $35,000 car and your lease payments are $525 a month, you'll be able to write off $25,200 (48 x $525) over four years, or nearly twice as much.
No down payment, lower monthly payments, no resale hassles, potential tax savings - these are nice advantages but, unfortunately, they're not the only side of the leasing story. As a rule, leasing almost always costs more than buying a car outright with cash or even financing it (see Figure 5). At the end of the lease, you have nothing to show for all those monthly payments except memories and gasoline credit receipts jammed in the glove compartment. However, there are a few exceptions to the rule. If a manufacturer-subsidized or subvented lease offer is available, leasing can be less costly than financing a purchase. Subsidized leases very often have net interest rates several percentage points below the APR for a loan.
Also, if you have a surefire investment that is expected to pay a higher return for your cash (net of taxes) than the interest rate on your lease, leasing may be less costly. But in these days of 1 or 2% money market rates, few of us have such high-paying, risk-free investment opportunities. Leasing may also be less costly if you can use your cash to pay off existing high-interest loans - credit card balances at 16% interest, for example - instead of putting the cash into a new car.
But there are some special financial pitfalls to leasing. If you're leasing for the first time, you'll probably have an old car to trade in to the dealer. Your equity in your trade-in will serve as a down payment - or in the vernacular of leasing, a "capitalized cost reduction" - to reduce your monthly lease payment. But keep in mind that because you'll end up owning nothing when your lease is up, you won't have a trade-in the next time around. You may face a substantial jump in your payments on your second leased car unless you can come up with another cash down payment - and having to come up with a big down payment defeats one of the advantages of leasing.
Then there are possible mileage penalties. Most folks drive around 15,000 miles a year. But many leases - especially heavily advertised lease deals with attractive monthly payments - provide for only 10,000 or 12,000 miles of use per year. For each mile you drive over the allotted amount you'll pay a penalty - typically 12 to 15 cents, though it can be as high as 25 cents for some luxury cars. That means you'll be presented with a bill for several thousand dollars at the end of a three-year lease. You can often negotiate a lower extra-mileage penalty upfront if you anticipate that you'll be driving extra miles. Even so, leases are much less likely to be cost-effective for those who drive more than 15,000 miles a year.
The same goes for people who don't take excellent care of their cars. Though leases do of course have allowances for some wear and tear, they are written with the understanding that you'll follow the manufacturer's maintenance recommendations and that you'll return the car in good order. If you don't, the dealer could present you with yet another lease-end bill - this one for repairing dents or torn upholstery. The question often becomes a matter of what constitutes excessive wear. Some automakers are addressing the issue by attempting to specifically define damage. Ford dealers have loose-leaf binders with photos illustrating normal and excessive wear. Mercedes-Benz dealers will disregard a dent or scratch if it's no larger than a credit card. But in any case, if you tend to be cavalier about your car's upkeep, leasing probably isn't right for you.
Nor will it be right for you if there's any chance that you might need to get out of the lease early. When you lease, you are paying for the car's expected depreciation during the term of the lease, plus an interest charge. Though your lease payment is the same each month, depreciation is not; a car depreciates more early in its life than it does later on. So, when you end a lease early, you haven't paid your full share of its depreciation and leasing companies will expect you to make up the difference - and pay an early termination fee on top of that. Altogether, early termination charges can amount to more than the remaining balance on the lease.
In summary, leasing does have advantages for some motorists - as long they look beyond the lower monthly payments and consider all the potential costs.
