Saturday, January 7, 2012

Cars: Benefits of Leasing

For those of us looking at cars entering into college or graduating out of college, we may not be all to familiar with the process of buying a car.  I haven't bought my own car yet so I can't say I am an expert in the area, but a friend of mine is looking to get a car soon and I will eventually need to look into it as well.  I thought I'd post some information about an alternative to buying a car: leasing one.  What is a lease?  A lease is kind of like renting a car but you have some restrictions for what you can do with the car (like stay within a certain mileage for a specified period of time) and you have the option of purchasing the car you lease at the end of the term.  If you fulfill your side of the contract, you can return your car and just walk away.

Although this form of accessing a car has its benefits, it isn't for everyone.  What are the benefits?  First, you get to drive a new car every few years.  For those of us who need to be using the newest technological and safety innovations, leasing gives us that privilege.  There may be tangible benefits associated with the newest safety system, but most of the benefit is probably from the ability to show off to your friends the newest car each time it comes out.  This reason depends on your lifestyle but for some of us, it may be a necessity.

A financial reason to lease instead of buy a car is that you usually have lower monthly payments than if you got financing to pay for your car.  The reason is that you are mainly paying for depreciation of the car which is the amount of value used up by driving the car.  For example, a $20,000 car with an expected life of 5 years would be depreciated $4,000 a year ($20,000/5 years = $4000/year).  The basic idea is you would be paying $8000 over two years to lease a car rather than making payments for the entire $20,000.  Obviously, you aren't only paying for the depreciation of the car but you aren't paying for the entire car which is why monthly payments are usually lower.  Generally, European and Japanese cars have lower depreciation than American cars and are generally cheaper to lease.

Another big benefit for leasing is the avoidance of the hassles that come with owning a car such as repair bills. This is probably a bigger benefit when comparing to buying used cars which have a much higher risk.  You are paying for the benefits of not having to worry about some of these issues since the car won't necessarily belong to you at the end of the lease term.  This also means you should pay close attention and get the most basic car when looking at cars to lease since you probably won't be getting the benefits of ownership that come with some of the extra accessories such as an undercoating or security system.  All leases should also come with GAP insurance which covers the difference between what you owe on the lease and the remaining value of the car if it happens to get totaled in an accident or stolen.

To summarize some of the benefits of leasing:
  • You get a new car frequently
  • Short-term affordability with lower monthly payments
  • Fewer repair bills and risks associated with car problems
Update: I also receied some more helpful information from a friend of mine who is more experienced in this area.  Read the comments below for more details.


  1. My friend Samantha Farmer had some additional information to share about leasing and owning cars on Google+. I've copied and pasted those comments here for readers who can't see my Google+ account.

    "If there are mechanical and/or cosmetic issues with the car that are not covered by warranty, you will be penalized for not repairing them when you return the car. Often luxury cars can be purchased used--usually only 2-3 years old, generally of the same body style and with more upgraded features with payments comparable to leasing a new car. Cars that are well-maintained can be sold privately or traded in for newer (if not brand new) models, and the payments made usually cover more than just depreciation. It's always great to get equity in something! Realistically leasing is not always the best option for somebody just out of college because once the lease car is turned in a few years down the line, leasing or buying a new car usually requires a down payment that the individual might not have available.

    For people entering the business world who want/need to have luxury cars, buying used is definitely a great option. Buyers can often find luxury cars with higher mileage on them for a really great deal. While some people are turned off by higher miles, a lot of the cars come with extensive service records (receipts for every oil change, new tires, etc.) that indicate the car has been well maintained, and when broken down it amounts to maybe 2000-4000 more miles driven per year. The majority of these luxury cars will survive to well over 100,000 miles and still have a lot of life in them for quite a bargain compared to leasing or buying new. Additionally, some used cars can have the original warranties transferred to the new owners (those 6 year/60,000 mile and 10 year/100,000 mile ones you always hear about on TV commercials). If a warranty cannot be transferred, a thrid-party warranty can be purchased for a small additional cost to give you peace of mind."

    Thanks again Samantha for the insight into the car market.

  2. Wow, that makes it seem like the best way to own a car is to lease it first. The best part of a leasing agreement is having free maintenance for the duration of the lease, allowing you to use the allotted money on other things. We’ll never know when we’ll need to spend a lot on repairs, but whatever is it, it’s all free!

    Nettie Christensen