Buying a car with a conventional car loan? Here’s how it works: you borrow money and make monthly payments for 3 to 6 years. Part of your payment is interest on what you owe and the rest pays down principal. By the end of the loan period, the car belongs to you. You can keep it as long as you want and there are no more payments. When you are ready to trade it in or buy a new car, the money you get from the resale is yours to keep.
Another transportation option is to lease a car. We’ve all seen the popular TV ads – those low monthly costs are tempting if you are in the market for a car. But is leasing a good option for you?
The good news about leasing a car
When you lease a new car, you get to drive a late-model vehicle during its most trouble-free years. You may even be able to afford to drive a higher-priced car, with more feature upgrades. That’s because you are only paying the depreciation costs – the difference between what a new car is worth now and what it will be worth in 3 years, at the end of your lease. If you are a business owner, there could be some significant tax advantages. When the lease is over, you drop the car off at the dealer and walk away.
Downsides of leasing
- While the monthly payments are lower in a lease, the payments go on forever, lease after lease, unless you take the lease’s buyout offer or decide to buy another car at the end of the lease. With a lease, you never own the car outright. By contrast, when you buy a car with a conventional loan, your payments end once the loan period ends and you own the car free and clear at that point.
- Lease contracts specify a yearly limit on miles, typically 12,000 – 15,000 miles a year, although it could be as low as 10,000. If you go over that limit, the mileage penalty can range from 10 to 50 cents a mile.
- If you have to terminate your lease early, there are early termination fees and penalties, which could be thousands of dollars due at once. In some cases, these charges can equal the amount of the lease for its complete term.
- All lease agreements require that you maintain the vehicle in good condition. If the car is returned with excess wear-and-tear, you’ll have to pay extra charges when you turn it in.
- If you use leasing to step up to a higher-end vehicle, the insurance costs could be higher than you expect.
Does it make sense to lease?
If you fit the mileage requirements, are easy on cars, want to upgrade every few years, and don’t mind continuous monthly payments, leasing may be for you. Be sure you can afford the monthly payments for the entire lease period, because the early termination fees are costly.
If you drive over 10-12,000 miles a year, want to build equity in your car and keep it longer than your loan (typically 3 to 5 years), you are better off buying. Over the long term, the cheapest way to drive is to buy an affordable car and keep it forever.
Image courtesy of winnond at FreeDigitalPhotos.net