Leasing is an increasingly popular way for buyers to fund a new vehicle “purchase” these days, but have you ever wondered if leasing a car is right for you?
Leasing a car is worth considering if you have a need for a car and you don’t want to keep it for more than a few years. If you like the peace of mind of driving a new vehicle that’s always covered by the manufacturer’s warranty and you usually change after three years anyway, leasing can be an extremely cost-effective and convenient way to have a new car, truck or SUV.
If you’d like to know more about auto finance for new cars and if it’s going to be a good idea for you, here’s an article I wrote that explains new car finance in an easy-to-understand way.
Benefits to you of leasing a new vehicle:
- You get to drive a brand new car during its most reliable years
- You’ll be covered by a full manufacturer warranty
- You could get a bigger, better, more prestigious, or more generously equipped vehicle than you might be able to afford otherwise
- Forget worrying about depreciation and trade-in values as they will be things of the past
- No hassles with time-wasting buyers when it’s time to change your vehicle as you simply hand the old one back to the lease company
- The comfort of fixed monthly payments that make budgeting easy
- Stay up-to-date with the latest vehicle technology
- Leasing can be an extremely tax-efficient way of running a vehicle for a business
- Very low or even no deposits are required at the start of a new lease
- Leasing can work out significantly cheaper than other ways of “buying” a car
What’s the difference between leasing and buying?
You may have noticed I put “buying” there in quotation marks, and that’s because I need to clarify what buying means in the context we have here. Generally, when most of us refer to buying a new car, what we really mean is getting a new car that’s ours to drive until we decide to change to another.
This could mean it’s been fully paid for in cash upfront. It could also mean it’s on a regular finance agreement where it’s yours when all the payments are complete, so the end goal is full ownership, even if that also involves having to pay a large “balloon” or residual payment at the end.
Those ways of buying a car eventually result in you becoming the owner of the vehicle, but with leasing, the vehicle always remains the property of the leasing company. Some agreements do offer the option to buy the car at the end of the lease, but why would you?
Instead of paying the current market value to the finance company for an aging car you’ve already had the best of, and is probably coming out of its warranty period, why not get another brand new vehicle and start all over again?
Is ownership important to you?
I have to be straight up and honest with you all here because my experience in the retail auto industry taught me that some people can get really hung up on the concept of ownership. To be fair, it tends to be older consumers who can become obsessed with the idea of actually owning the car they drive.
Younger consumers, especially millennials, are generally ambivalent about whether they own the car or not. Younger buyers are well used to things like smartphone contracts so leasing a car can feel completely natural to them, and not much of a big deal at all as they get the latest thing for not a lot of money each month.
If you’re one of those people who are not sure about what is effectively renting rather than owning a car, just think about it laterally for a moment. If you buy a car with any other type of finance agreement, even if it’s interest-free, you do not own the car until all the payments have been made and the agreement is settled.
Also, what about a mortgage? Do you feel uncomfortable about the idea of living in a house for 25 years until the mortgage is paid off? Most of us are fine with that, so why get uptight about the finance company owning the car you’re driving, especially when you’ll be replacing it with another brand new one before you know it?
Leasing means reliability, peace of mind, and low maintenance costs
The main reason I switched to leasing a new car was because I was sick of paying to have the ageing used cars I’d bought for very little fixed when things went wrong. On one occasion, the tires on my car that had really deep tread and looked to be in really good condition had to be replaced because they were so old they were staring to crack quite badly. Even if you don’t drive a car a great deal, age takes its toll and things degrade and wear out. In my case, because the car had pretty big wheels a set of new tires cost almost as much as the car was worth.
If you lease a brand new car you have brand new tires, and if you don’t drive a lot of miles each year you probably won’t have to pay for any new tires before the car goes back, and then you get a new car with brand new tires all over again. Of course, if you have a puncture that can’t be repaired while you’re leasing the car, or if you have to replace a tire or tires for any other reason, you’re still going to be responsible for the cost.
It’s a similar story with other wear and tear items on your car. If you lease your car for three years or less and you don’t do more than average miles, it’s unlikely you’ll have to replace things like the exhaust or the brake rotors. You hand the car back with all those things worn, and as long as they’re not unreasonably worn, you can then take out another lease and get another vehicle where everything is new on it again. What’s not to like?
Is leasing right for you if you do drive a lot of miles each year?
It’s true that leasing a car if you drive a lot is going to cost you more than the same vehicle would cost someone who doesn’t drive as much you do. However, although you are then likely to get into the realms of replacing some wear and tear components, you can offset the pain a little by taking out maintenance with your lease.
A maintained lease costs more, but it then covers you for the cost of servicing as well as for the replacement of wear and tear items like brakes, tires, exhausts etc. Like the lease itself, the more miles you drive, the higher the monthly price.
Be prepared before you start shopping for a lease deal on a new car that it will cost more if you do intend to drive a lot of miles. The price could look high, in fact, very high. Once again though, there is another side to consider that could still make leasing right for you, which is depreciation.
The higher the miles on a car the less it’s worth. Depreciation is the difference between what a vehicle initially costs to buy and what it’s worth when it’s eventually sold. Don’t be under any illusion here. Depreciation is the single biggest cost related to running a vehicle of any sort, and it’s also the biggest reason why leasing is such a fantastic way of running a car.
If you do a lot of miles of driving each year and you want to know more about how high mileage effects depreciation, check out my article on high mileage cars here.
Forget about depreciation, but only if you lease your car
Take a 2020 Chevy Malibu LS for example. If you went to a dealer to buy one brand new and paid the full MSRP it would have cost you $24,095 without any options. According to the NADA guide, a 2016 Malibu LT with 36,000 miles had an average trade-in price in 2019 of $12,350, which means its value would have depreciated by $11,745 in three years.
A quick search online for a 36-month lease deal revealed an offer for a 2019 Malibu LT for $312 per month after a $2,307 down payment. Over the three-year period that’s a total cost of $8,075, which is $3,670 less than the depreciation would have been if you’d bought the car outright. So, if you intend to keep a car like that for three years, leasing it will be $3,670 cheaper than if you bought it outright and then sold it.
You should also think that if you bought outright you would have had your precious $24,095 tied up in a depreciating asset for three years, instead of it being more wisely invested somewhere you might actually make money.
Likewise, if you’d bought the car on a three-year finance agreement, as well as the $24,095 MSRP, you’d also have been paying interest on the money you borrowed. Whichever way you look at it, leasing is more affordable.
In my particular case, the first new car I leased had an MSRP of $27,550, and with the deposit and 24 monthly payments, it cost me just over $8,000 in total over that period. I checked with a dealer friend of mine when it went back to the leasing company after two years, and he said it was probably worth around $12,325 if I’d been trading it in. By leasing instead of buying, in just two years, I saved $7,198 and that’s why I will never have a new car again unless it’s on a lease.
If you’re concerned about at you could do if you took out a lease and at some point found you could no longer afford the payments, here’s an article I wrote that reveals all you need to know about getting out of a lease early.
All I’ve sought to do here is to give you an idea of why I believe leasing a car is a good idea for the vast majority of people. Leasing isn’t going to be right for everyone, but I genuinely believe the good points heavily outweigh any negatives, and it’s hard to make a solid case against it.