When Leasing Makes Sense
If you always have a car payment—because you trade in your cars often or you tend to finance with long-term loans—then leasing is a good choice.
The world of new-car shoppers is divided into two camps: those who buy and those who lease. Buyers like the peace of mind of owning their vehicle and knowing that if they pay cash or keep the car past the loan payoff date, they’ll likely come out ahead financially. Yes, you’re on the hook for repairs after the warranty expires, but repairs are likely to cost less each year than car payments.
Take Our Quiz: Should You Buy or Lease Your Next Car?
Lessees love the flexibility to trade up frequently to a brand-new set of wheels. More than one-fourth of new-car transactions in 2014 were leases, and the percentage is rising. Matt Jones, of Edmunds.com, says part of the reason is a new mentality among shoppers. “You have a new generation that isn’t as invested in the idea of personal ownership.”
The case for leasing. If you always have a car payment—because you trade in your cars often or you tend to finance with long-term loans—then leasing is a good choice. Because you’re paying for a car’s depreciation only over the term of the lease, your payments are lower than if you financed the entire cost. The majority of leases are written for three years, so a leased vehicle is almost always under warranty.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Suppose you buy a 2015 Chevrolet Malibu 1LT for $24,560 with a five-year loan and 10% down. With Chevy’s 2.9% financing offer, your payments will be $396 a month. Now suppose you get the itch to buy a new car after three years. If you trade in the Malibu, you will likely get about 50% of the sticker price, or $12,280, according to Kelley Blue Book’s estimated resale value. After you pay off the loan, your total out-of-pocket cost will be about $13,290.
However, you can lease the same Malibu for $179 a month for three years with $1,209 down. Your cost will be about $8,650 over three years, including the fees leasing companies impose—a front-end acquisition fee ($600 to $800) and a back-end disposition fee (about $350). Leasing leaves you more than $4,600 richer. The scales tip back in favor of buying when a vehicle has higher-than-average resale values, because you’ll get more when you trade it in.
Leasing does come with strings attached. Excess wear and tear will cost you, although leasing companies usually don’t charge for scratches or a less-than-pristine interior. Plus, mileage is typically capped at 12,000 to 15,000 miles per year, and you’ll pay about 20 cents per extra mile at the end of the lease. You can negotiate a high-mileage lease—up to 30,000 miles per year—but you’ll pay extra for the increased depreciation.
Keep in mind, however, that when you buy a car, high mileage, customization, and dents and dings also drag down its value. The money comes out of your pocket when you sell. Also, if you decide to trade in a vehicle, you may get less than you anticipated if its value suddenly drops—as SUV values did when gas spiked to $4 a gallon in 2008 and owners dumped them en masse.
If you want to get out of a lease, there are ways to do it without paying an early-termination fee. A dealer may contact you for a “pull-ahead program,” which lets you return your car to the dealer and lease a new car, often at more-favorable terms. (Dealers sell your previous car as a certified pre-owned vehicle.) Or you could sell the car yourself and walk away from your lease with a check in your hand if your vehicle is worth more than the purchase price written into the lease (see our story Cash Out Your Lease on Your Car).
LeaseTrader.com and SwapALease.com match lessees who want to exit early with shoppers looking to pick up a short-term lease (cost for the service: $100 to $350). Because the remainder of the lease payments will be made, you won’t pay an early-termination fee.
Ask Jessica a question at janderson@kiplinger.com, or follow her on Facebook.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Don't Leave Your Heirs an IRA Tax Bomb
Your traditional IRA has served you well, but when your heirs inherit it, watch out. Consider some of these strategies to minimize their tax burdens.
By Kelsey M. Simasko, Esq. Published
-
Five Ways to Maximize Your End-of-Year Philanthropy
To do the most good, pick the right charity, be smart about how you donate and consider giving something just as valuable as money: your time.
By Emily Glassman Published
-
Gas-Saving Tips That Actually Work
These are gas-saving tips that will actually work for you and your car this year.
By David Muhlbaum Last updated
-
Want to Lease an EV? There's a Tax Credit 'Loophole' for That
Tax Credits If you are deciding whether to lease or buy a car, here's what you need to know about the EV lease tax credit.
By Kelley R. Taylor Last updated
-
Car Buying in a Topsy-Turvy Market
You need a new car? Good luck with that! What should you do? We've got some answers.
By Katherine Reynolds Lewis Last updated
-
Watch Out for Flood-Damaged Cars from Hurricane Ian
Buying & Leasing a Car In the wake of Hurricane Ian, more flood-damaged cars may hit the market. Car prices may rise further because of increased demand as well.
By Bob Niedt Last updated
-
Car Buyers: The 3-Day Grace Period Is Just a Myth!
Buying & Leasing a Car Many car buyers think they have three days after making a purchase to return a car. Here’s where they’re going wrong, and what they should do instead to get a decent used car.
By H. Dennis Beaver, Esq. Published
-
PODCAST: Car-Buying in an Inflated Market with Jenni Newman
Buying & Leasing a Car With cars both scarce and expensive these days, what to do if you want – or need – a new ride? Car-buying strategist Jenni Newman of Cars.com shares some tips. Also, more on the magical 9% savings bond.
By David Muhlbaum Published
-
The "Real" Cost of Buying a Car
Brandon Copeland Atlanta Falcons linebacker and Kiplinger contributing editor Brandon Copeland illustrates how car prices are far more than meets the eye.
By Brandon Copeland Published
-
How to Get a Car Deal in This Market
Buying & Leasing a Car Low inventories mean it’s hard to haggle on price, but you can still negotiate on financing when shopping for a new or used car.
By Rivan V. Stinson Published