Why You Shouldn’t Lease Your Next Car

If you’re looking for a new car, there’s a good chance you’re considering a lease.


Leasing typically gives you much lower monthly payments compared to taking out a loan to buy a vehicle, letting you drive more car than you might otherwise be able to afford. That’s one reason about a quarter of new vehicles now are being leased, the highest percentage in at least five years, according to Experian Automotive.

But there’s a good reason why you should think twice before leasing: In exchange for those low monthly payments and a new car every few years, you’d likely pay a lot more than if you financed a purchase and held onto the vehicle.

Leasing is poorly understood

Even those who lease don’t fully understand what’s going on under the hood.

Some lease customers don’t even realize that they should negotiate the price of a leased vehicle just as if they were buying. That’s why some leases end up being based on above-market vehicle prices or even the manufacturers suggested retail price. One reason leasing is so confusing is that it’s very difficult to compare the cost with that of financing a purchase, even if those lease advertisements supplied all the details you’d need to crunch the numbers, which they typically don’t.

And those advertised monthly payments can be deceptive. The fine print in one recent lease promotion revealed that the advertised $159 monthly payment didn’t factor in a lease “acquisition” fee of $650.

The secrets behind leasing

Leasing simply is another way of financing a vehicle. Instead of paying for the entire car, as you would if you purchased it, you pay only for its loss in value while you have it, the so-called depreciation. As a result, you won’t own the vehicle at the end, as you would with the loan.

Compare, for example, a 36-month lease and loan for a new Toyota Corolla with a negotiated price of $20,000.

In both cases, when you drive off in the car, you’re essentially borrowing $20,000 (assuming no down payment). The difference is that, with the loan, you’ll pay back the entire $20,000 and get to keep the vehicle, which after three years, will still be worth around $13,000.

But with the lease, you pay only the vehicle’s loss in value, about $7,000, and then return the car (unless you decide to buy it). Either way, the net amount you will have paid back is around $7,000.

But that’s not all. In both cases, you’re also charged interest on the entire $20,000 you borrowed, minus whatever you pay back along the way. And there’s the rub. Because you pay back less during the lease term, a greater amount is subject to the interest rate every month.

That’s why lease-related finance charges are higher than those for an equivalent rate and term loan.

Lower interest rates matter

Normally, the difference in finance charges alone makes leasing more expensive than buying.

But with today’s unusually low market interest rates, made even lower by carmaker incentives, the difference in finance charges may not be that great. In some current lease offers we examined, any difference in finance charges were offset by the sales tax savings that lease customers get in most states. In some cases, those tax savings even offset hundreds of dollars in lease-related fees.

Considering that leasing a Corolla for 36 months can cost less than $190 a month, compared to a $500 loan payment, leasing ends up looking really attractive.

But don’t jump in just yet. The first thing to consider is that you may not qualify for those ultra-low interest rates if you don’t have a stellar credit rating. And low interest rates won’t last forever. So when your lease ends after three years and you have no car, you may discover that rates have gone up.

The costly new-car merry-go-round

And there’s another big downside. Leasing puts you on track to get a new car every few years. That may sound like a good thing, but it’s very costly.

Vehicles lose their value much more quickly when they’re new than later on. So during a typical two- to three-year lease, the car or truck declines in value rapidly. And the lease customer is being charged for all that depreciation. If you keep leasing, that can really add up. For example, a new $21,000 Corolla driven 12,000 miles annually would depreciate more than $7,000 within the first three years, compared to about $4,000 during the next three.

So if you lease two new Corollas consecutively over six years, the combined depreciation would be more than $14,000, and you have no car at end. But if you purchased a Corolla and kept it over the same six years, the vehicle would depreciate around $11,000, leaving you with a car still worth more than $9,000.

The difference is even more dramatic if you lease three times over nine years. The combined depreciation of those three new Corollas would be more than $21,000, compared to just $14,000 for the purchased vehicle, now still worth more than $6,000.

If you add all the lease-related charges, leasing those three Corollas over nine years could cost you $10,000 more than just buying one car and keeping it.

The amount would be even if even higher if Toyota increases Corolla prices over the next six years or if interest rates climb, both of which are very likely.

Even if you consider the amount you’d pay for maintenance and repair while keeping the purchased car for nine years, you’d likely come out far ahead, especially with a reliable model like a Corolla. You could even opt for a 48-month loan instead of a three-year one and have money to spare.

Other concerns

Another leasing drawback is that you could end up with unexpected costs. For instance, you’ll face extra charges if you return the car damaged or with other so-called excess wear and tear. 

You’ll also have to monitor how much you drive. Most leases limit you to a certain number of miles. If you drive your leased Corolla more than 12,000 miles a year, you’ll be charged 15 cents for every extra mile.

Many lease customers don’t realize that using the car too little is a problem, too. If you return the vehicle having driven fewer than the allowed number of miles, you will have paid for miles you didn’t use.

You can avoid those extra fees or the under-mileage problem by purchasing the car at the end of the lease or by negotiating credit for the miles you don't use and putting that toward the cost of another vehicle. But that can be a hassle, and you have to know what you’re doing.

Finally, leasing is riskier than buying. If you discover you no longer can afford the payments, there’s no easy way out. Break a lease contract and you might be required to make all the remaining payments and fork over an early-termination penalty.

In contrast, if you buy a car and find you can’t afford the loan, you could sell the vehicle. That should bring in enough to cover the amount you still owe, especially if you made a large down payment and kept the loan reasonably short. You might even walk away with money in your pocket.

What you should do

From a financial standpoint, it makes better sense to buy than lease.

As a rule, purchase a reliable car that you can afford with a loan of no more than 48 months. Make a down payment of at least 10 percent of the purchase price in cash or trade-in.

That will keep the costs down and reduce the likelihood you’ll come up short if you have to sell the car early or if the vehicle is totaled or stolen while you’re still paying off the loan.

An alternative is to consider buying a reliable used car you’ve had checked thoroughly by a good mechanic. Once you get that new or used car or truck, maintain it as the manufacturer recommends and hold onto it until at least you complete your loan payments, preferably longer.

#story_page_post_article

Understand the importance of honest news ?

So do we.

The past year has been the most arduous of our lives. The Covid-19 pandemic continues to be catastrophic not only to our health - mental and physical - but also to the stability of millions of people. For all of us independent news organizations, it’s no exception.

We’ve covered everything thrown at us this past year and will continue to do so with your support. We’ve always understood the importance of calling out corruption, regardless of political affiliation.

We need your support in this difficult time. Every reader contribution, no matter the amount, makes a difference in allowing our newsroom to bring you the stories that matter, at a time when being informed is more important than ever. Invest with us.

Make a one-time contribution to Alternet All Access, or click here to become a subscriber. Thank you.

Click to donate by check.

DonateDonate by credit card
Donate by Paypal
{{ post.roar_specific_data.api_data.analytics }}