Ten years ago, about 16% of new cars became lease vehicles. Today, nearly one in three vehicles on the road is leased. Why lease a car? It depends on your goals. If you’re looking to justify a lease, here’s why it might make more sense, along with some items you should try to negotiate before making the deal.
Why Lease a Car?
1. Have a Nicer Ride
About 75% of luxury cars are leased. Karl Brauer, senior analyst at Kelley Blue Book’s KBB.com, explains, “People can often afford to lease a higher-priced car than they can buy, which typically means leasing a luxury nameplate versus buying a non-luxury vehicle.”
Wondering how that’s possible? Automakers such as Audi, BMW, Land Rover and Lexus typically have high residual values. Because the dealers have that high residual value to look forward to, once your lease has expired, they can offer expensive cars for not much more per month than non-luxury vehicles.
Dealerships then essentially sell the car twice. The first time they sell is when you enter into a lease agreement. The second time they make a sale is after your lease term has expired, when they sell the car outright, often as a certified pre-owned vehicle. If you’re looking for a luxury car, you and your dealership win.
2. The Down Payment Is Low, or Sometimes Nonexistent
If you’re unable or simply don’t want to pay a large down payment, leasing a car might be the right option for you. A lease is a form of financing; it’s not a loan. A down payment is just used to lower your monthly payment. A down payment on a leased vehicle actually exposes you to more risk and a lost opportunity-cost.
How could a down payment on a leased car put you at risk? When you put a down payment on a leased vehicle, you’ll never see that money again. Your car could be wrecked or stolen in the first month, and if your down payment were $5,000, you will have just paid $5,000 for a one-month lease. Ouch. Even with comprehensive insurance and a GAP insurance policy, that down payment will never be refunded. Your insurance company pays the dealership (which owns the car), not you.
So why do salespeople encourage you to make a hefty down payment? To lower your monthly payment. But while you may prefer to avoid a high monthly payment, making a huge down payment doesn’t make great sense. Think about it: you’re spending a lot of money upfront to avoid paying that same amount of money over a long period of time, essentially giving the dealership an interest-free loan. Instead, consider parking your hypothetical down payment money in an interest-bearing checking account.
You are probably familiar with the term ‘zero down.’ That means you walk out, keys in hand, never having given anything other than a commitment to cover the monthly bills. These are very common. However if the dealer gives you an incentive to give a down payment, hear them out. That incentive may include a higher mileage allowance or damage forgiveness. A bit of leeway could make putting some money down worth it.
Will you make a down payment? Will you aim for zero down? Whichever you choose, getting into a leased vehicle will be cheaper than buying a vehicle.
3. Monthly Lease Payments Are Lower Than Monthly Loan Payments
Monthly lease payments are usually lower than monthly loan payments because you’re paying for the vehicle’s depreciation only during the life of the lease. When buying a new car, you must pay for the entire vehicle – including any taxes, fees and any finance and interest charges, should you take a loan for it.
As a current example, Edmunds.com shows that leasing a 2015 Honda Accord EX, valued at $24,983, is $57 cheaper per month than buying the car with monthly installments. That’s $684 a year you’ll save with leasing. If you need the money now, leasing might make more sense.
Interested in driving something even pricier? The hugely popular automaker Tesla has just released a leasing program. According to an article from Car and Driver, “A base 60-kWh Model S is 16.6-percent cheaper at $777 per month for 36 months (12,000 miles per year), compared to the $932 Tesla was offering under its loan program.” That’s a savings of $1,860 per year.
Be prepared to have your credit checked as part of the leasing process. That’s why it’s a good idea to check your own credit ahead of time to make sure there are no errors or other problems with your credit reports that could be dragging down your scores. You can get a summary of your credit report for free every month through Credit.com.
4. Uncle Sam Rewards You With Tax Benefits
By leasing a car, you only pay taxes on your monthly payment. If you were to buy the car, you would owe the entire amount of sales tax within 30 days of purchase. That’s a hefty bill.
Kiplinger.com used a Nissan Altima as an example: If you secured a low interest rate (2.9%) on a three-year lease, you would end up paying taxes on just $8,264 instead of the sales price of $21,403. Looking to negotiate? Dealerships might offer to pay your sales tax for you.
5. You Typically Pay No Repair or Maintenance Costs
“Leasing a car, typically for three years, ensures that the vehicle has full warranty coverage during the entire lease period,” says KBB.com’s Brauer. Many lease agreements are shorter than vehicle warranties. If anything does break, you won’t have to pay a dime for car repairs. Maintenance costs are usually covered as well.
Even if maintenance costs aren’t covered, you should still keep the car maintained. Dealerships will check the car for signs of neglect, and will ding you unless you’re able to demonstrate you’ve maintained the car as recommended by the manufacturer. See if you can negotiate free maintenance before signing your lease agreement.
During your lease, if car parts that wear – such as brakes or tires – need to be replaced, you may need to cover those costs. If you regularly enjoy hard braking and acceleration, it might be worth it to inquire about an extended warranty to cover the cost of those items, which will be called out in the agreement. When I bought my vehicle, I purchased an extended warranty for about $2,000, and that began to pay for itself when the car needed a $1,200 brake job.
6. There’s Little Hassle
Financial matters aside, leasing a vehicle is more convenient than buying. If the car is a lemon, you’re not stuck with it. If you decide the vehicle isn’t right for your lifestyle, lease a different one. It can be far easier to wait for a lease to expire than it is to sell a car and find a new one.
You also don’t have to worry about whether or not the car will still look stylish in the future – your car will probably look good for as long as you have it on lease.
7. You’ll Always Have That New Car Smell
Variety is the spice of life! Leasing a car makes it easier to switch from car to car. Today you may want a nimble Mazda MX-5. Tomorrow you may want a BMW M5 with its twin-turbo V8. Maybe these are all just place holders until you can get the Tesla pickup truck. You have so many options.
What Will You Do?
If you appreciate luxury vehicles, low down payments and don’t drive long distances regularly, you’re probably no longer wondering “why lease a car?” – doing so is probably the right choice for you.
Once you Get a Leased Vehicle, Keep These Three Things in Mind:
Do not terminate your lease early. Switching to another leased vehicle is easy, but terminating the lease early will involve penalties.
It’s a bad idea to modify or accessorize your leased vehicle. This may even void your lease agreement. The dealership will charge you for ‘damages’ if you change their vehicle in any major way. Also, most modifications and major accessories will void the car’s warranty. Leased vehicles will come with a warranty that usually covers the length of the lease. Also remember that unless you buy the car at the end of the lease term, those modifications are gone forever. The next owner will enjoy your upgraded sound system — unless you want to pay to undo everything you just did.
Be good to the car. Excessive wear charges will apply if you do damage to the vehicle while it’s under your supervision.
Rob Infantino is founder and CEO of Openbay, an online marketplace to compare, book and pay for car repair. He has always worked on cars, including transmission replacements and engine rebuilds, and spent years working on a pit crew. Rob holds a Bachelor of Science in electrical engineering from the University of Connecticut. A noted authority on car repair, Rob’s interviews have appeared in BBC Autos, Boston Globe, The Economist and NY Daily News. More by Rob Infantino
This article was originally written by Rob Infantino, founder and CEO of Openbay, for Credit.com, where it was first published, then syndicated to Yahoo! Finance and the Atlanta Journal-Constitution, among others. It has since been updated.
Image credit: Caitlin Regan, Flickr