Car Leases Are Common, But Are They A Smart Financial Option?
- Author: Kelly Cooke
- Posted: 2024-07-20
There are multitude of options available for acquiring a vehicle, with leases being one of the most common. TV commercials and banner ads constantly tout the value of leasing a car, but how good of an idea is it really?
What Happens When You Lease A Car?
When you lease a car, you're essentially renting a car from a dealership for a set period of time for a set monthly rate. Many leases also come with agreements that you'll only drive a certain number of miles and usually fall under the category of 'open-ended' or 'close-ended.'
With open-ended leases, the value of the car ends up factoring into what you ultimately pay; if the car is worth less than anticipated after the lease period, you have to pay out the difference and if it's worth more, you get a refund.
With a close-ended lease, it's just a simple rental contract and the value of the car doesn't factor into what you pay.
When you lease a car, you usually don't have to go through financial institutions, like banks.
That being said, you almost always have to make a down payment and your ability to lease is usually going to be linked to your credit score.
What Are The Benefits of Leasing A Car
Leasing a car is a fairly common way people acquire a vehicle; here are some reasons why people opt for getting a lease.
Not Responsible for Devaluation
Although cars are considered to be an asset, the reality is that they're pretty terrible as far as investments go. Cars are notorious for losing their value quickly and paying cash or taking out a loan to acquire one could be a risky financial move. With a lease, you're not on the hook for the long-term depreciation, especially if you have a close-ended lease.
More Reliable
Almost all car leases are for cars that are new, instead of used. This means that you get to drive a car that's in top condition, with limited issues related to wear and tear like transmission, engine, or brake malfunctions. You also don't need to worry about long-term damage, since your lease will be up before any serious repairs will be necessary.
It's Cheaper
Both monthly payments and down payments for leases are generally cheaper than those related to wholesale financing of a car.
Why Are Leases Problematic?
Although car leases are common, that doesn't necessarily mean they're a sound financial decision. There are a number of reasons why you might want to reconsider getting one.
Mileage Limits
In order to prevent depreciation, dealerships put mileage limits in their lease contracts. This essentially means that you'll only be able to drive a certain number of miles during your lease period before you end up having to pay for every extra mile you drive, which can really add up.
Lack of Ownership
The obvious downside to leasing is that you won't actually own the car you're driving. While there are many benefits to this, the reality is that you're going to be limited with what you can do with your car. You can't use it as collateral, can't really modify it much, and there's no guarantee you'll be able to keep it long-term if you really want it.
Arbitrary Conditions
The specifics of a lease are always, always, always going to be in favor of the dealership no matter what. They ultimately get to dictate terms of the agreement and will do what they can to maximize the value of a lease to make them the most money. In particular, the concept of 'normal wear and tear' is often used as a justification for charging lessees more money than they anticipate.
Is Leasing for You?
Acquiring a vehicle is going to be a massive financial undertaking one way or another, but some methods are going to be much more favorable than others. When thinking of leasing, be really sure of exactly what you want in a car and what risks you're willing to take.
