To Lease or Not to Lease

Is it better to purchase or lease a new vehicle? Unfortunately, there is no definitive answer because the correct decision is based mostly on personal preference, financial situation, and driving habit of the consumer. Leasing has grown in popularity over the years for a number of reasons:

Manufacturers like the leasing concept, because from a marketing perspective it gives the appearance that a discount exists on a vehicle, when in fact one does not.

Dealerships are fond of leasing, as it allows those consumers who may have previously been priced out of the market for purchasing a new vehicle to become customers. As an added benefit, they also haven’t lost sight of the fact that at the end of the lease term that same customer will need another vehicle to drive, and conveniently for them, will physically need to return to the dealership to bring the existing vehicle back.

Consumers like leasing because they can choose to either drive a more expensive car for roughly the same expense as purchasing a lesser model, or drive the same level of vehicle to which they have become accustomed for a much reduced periodic outlay.

Leasing can certainly be an attractive way to go for many individuals. Conversely, for the wrong person leasing can prove to be a costly mistake. Therefore, the right decision is of course different for everyone. Below are the main pros and cons of leasing, which need to be considered when deciding if leasing may be right for you.

Pros of Leasing

You need the lowest payment possible. Many people choose leasing for the lower payments inherent to it. This stems from the fact that when leasing, you are simply renting the vehicle. Your payments constitute the depreciation on the vehicle for the term you have agreed to use it for, plus an extra added amount for a financing percentage rate (money-factor in leasing parlance) to compensate the leasing company for use of its money over the term.

You would like to drive a new vehicle every two or three years. Leasing allows it to be economically viable to trade your vehicle in for a new one at regular intervals, while the larger monetary burden of purchasing would have you upside-down (you owe more on the vehicle than it is worth) far longer.

The manufacturer’s warranty usually covers the vehicle for the entire lease term. This means that you don’t have to worry about costly repairs ever presenting themselves as you move from lease to lease.

Your credit is not as strong as it could be. When leasing, because you are simply responsible for the depreciation portion of the vehicle, qualifying for a lease is generally easier than qualifying for a financed purchase involving its entire value.

You avoid the hassles of having to sell, or trade-in your current vehicle when you want a new one. One of the built-in components of a lease contract is the prearranged return of the vehicle by the consumer. Once you have turned the vehicle in, you are free to either lease or purchase a new one.

Lower sales tax outlay than when buying a vehicle. With leasing, only the depreciation (the difference between the negotiated cost of the vehicle and the residual value which was set by the leasing company) is sales taxable to the lessee. With a regular purchase, the entire selling price of the vehicle is taxed.

Favorable tax treatment when the vehicle is used for business purposes. The IRS allows for more beneficial tax treatment of leased business vehicles over those which are purchased. Consult your tax professional or IRS guidelines for specific information.

Cons of Leasing

You own nothing at lease end. As was said above, leasing is simply in essence a long-term rental. If you are the type of person who enjoys driving a payment-free vehicle, albeit an older model, leasing is not for you.

You drive more than 15,000 miles annually. Most leases are constructed to include anywhere from 10,000 to 15,000 allotted miles, with the average lease usually being written for 12,000 miles. It is possible to pre-pay for additional miles at lease inception, however this sometimes becomes too cost prohibitive. Worse, should you exceed your set mileage allowance and not have pre-purchased, be prepared to pay even more when returning the vehicle.

You are responsible for any damage to the vehicle. While there are allowances to some degree for cosmetic wear and tear, any damage outside of these parameters will be chargeable at lease end.

You think you might like to customize the vehicle to your liking. Again, because no ownership is ever assumed, you are not authorized to alter the vehicle in any substantial manner which is unable to be reversed.

You are unsure about being able to commit to the fixed lease term. There are hefty lease termination charges involved should you need to get out of the lease early. Therefore, never commit to a lease without being sure you will be able to complete the term specified in the contract.