Leasing a car isn't right for everyone. It is most beneficial to those who claim their car or truck as a business expense. Nearly all leasing expenses attributed to business purposes can be deducted. If you can deduct vehicle costs for business, consult a tax advisor to find out which is better for you. Nothing is perfect, and leasing does have pitfalls. Unlike an outright purchase, you'll have no equity in the vehicle at the end of the payment period. This virtually guarantees that you'll be buying or leasing another vehicle once the lease is up. For consumers who are content with leasing, of course, that's a benefit rather than an obstacle.
Also, leases come with strict mileage limitations, usually 12,000 to 15,000 miles per year. If you exceed the total allowed miles by the time you return the vehicle, you'll be assessed a penalty -- which could be as stiff as 25 cents per mile. However, if you know or suspect that you'll be putting on additional miles, you can usually purchase extra miles in advance at a discounted rate.
If you tend to be hard on your vehicles, purchasing is probably a better way to go. Why? Leased vehicles must be returned in excellent condition, without dents, deep scratches, window cracks, or torn upholstery, and with all accessories in working order. Otherwise, you'll be assessed "excessive wear and tear" fees at the end of the lease period, and these can be steep.
If you're uncertain about your financial future, leasing might not be right for you, either. Once you enter into a lease, it's binding for the entire length of the agreement. Terminating the agreement is nearly always difficult and expensive. If you decide you want to get out of a lease in order to lease another vehicle, you might be able to have the first lease "bought out" as part of the deal. If you simply want out, you will probably be assessed a hefty termination fee designed to keep people from trying to break their leases.
Leasing a Car vs. Buying a Car
Here is an example of how the costs of leasing and buying a vehicle break down:
In this example, we compare the cost of purchasing a 2006 Honda Pilot EX AWD with a 36-month loan at 6.75 percent to what it costs to lease the same vehicle for 36 months. Lease specifics are based on a Honda-underwritten contract as advertised in the Chicago area during the month of July 2006. This example does not include taxes and licensing fees, which vary by region. Trade-in values were provided by Edmunds.
Lease = $33,595
Purchase = $33,595
Advantage: None. Leasing doesn't change the fact that a vehicle is being purchased. Just like buying a car, the actual price of the car can, and should, be negotiated. For simplicity's sake, our example, Honda Pilot, will sell for retail price. This is not far from real market conditions.
Lease = $2,000
Purchase = $6,719 (20 percent)
Advantage: Lease. If you can't come up with the down payment, leasing looks pretty good right now. Getting the best interest rate on a new-car loan usually means coming up with 20 percent of the purchase price as a down payment. Of course, many new car buyers have a trade-in to offset this expense, something a repeat lessee would not have. Note that in this example the lease down payment includes the first month's payment.
Lease = $359
Purchase = $825
Advantage: Lease. Leasing looks really good now. Paying for only a fraction of a vehicle has its advantages. Don't forget, this example is based on a 36-month lease versus a 36-month loan. Many shoppers will opt for 48-, or 60-month loans to reduce their payments, though this will increase total costs because of the interest. However, a direct comparison with a longer loan is difficult, as leases greater than 36 months are rarely available.
Total Spent After 36 Months:
Lease = $14,565
Purchase = $36,419
Advantage: Lease. If keeping money in your wallet is your primary goal, so far this lease is working for you. The buyer is out two and half times as much money as the lessee.
Residual Value of Vehicle:
Lease = $0
Purchase = $23,701
Advantage: Purchase. You probably saw this coming. As a lessee, you were merely renting a car. The buyer, though taxed by higher monthly payments, now has some serious equity in the vehicle. This is money that can be used as a down payment on another new vehicle.
Lease = $14,565
Purchase = $12,718
Advantage: Purchase. Here's the real bottom line. The lease would have saved you a lot of up-front cost, but counting the value of the vehicle, our purchaser is now almost $2,000 ahead.
Before you lease a car, there are several important things you need to know. We'll reveal these details in the next section.