Is Leasing a Car a Good Financial Decision?

Woman Buying a Car

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When you are ready to purchase your first car, you may be wondering if you should buy a new or used car or to lease a car. This is an important decision to make. You need to understand the terms and conditions surrounding your lease or your purchase. Generally, it is not a good idea to lease a car. It is best to buy a used car. A car depreciates the most rapidly in the first three years, and so it is best to purchase a car that is about three years old. You may be considering leasing a car because you want something new or because the payments are lower than purchasing a new car would be.

Learn more about how leasing a car works. 

How Does a Car Lease Work?

Generally, when you lease a car, you will need to make a down payment on the lease. This is like paying a portion of the lease in advance. Then you will make monthly payments for the length of the lease. Usually, these payments are lower than they would be if you were purchasing the car. The lease will have requirements that you need to meet to avoid an additional charge at the end of your lease. One of these is mileage charge. In the lease, it will specify the number of miles that you can go during the lease.

If you go over your mileage limit, you will be assessed an additional fee. Bumps and dings to the car may also have you paying additional fees or to get the damage repaired.

You will need to keep up the regular maintenance on the car. At the end of the lease, you will have the option to purchase the car and buy out the lease or turn it in. 

  • Be sure to check the terms of the lease including buy-back options and mileage
  • Get everything in writing including maintenance requirements

What Are the Benefits of Leasing a Car?

A car lease may have lower monthly payments than if you were purchasing the car. If you feel like you always need a new car, this is a way to move up to a new model every few years. Usually, you need to do maintenance in the first three years of owning a car, which means you should not have to deal with major car repairs. This may end up with a lower monthly payment, but you will constantly have a monthly payment. Additionally, you will need to have a down payment for your lease every few years.

If you are planning on leasing your cars continually, you will need to plan to cover the down payment every three years, which means you need to save money in addition to your monthly lease payment.

Why Is It Dangerous to Lease a Car?

Leasing a car is a bad idea for many reasons. The first reason is at the end of the lease you have nothing to show for all the money that you spent. You either must turn the car into the dealer (where they try to convince you to trade up to a new lease), or you must purchase the car at the end of the lease. There are also hidden fees associated with leasing a car. Often the mileage limits are difficult to stay under, and you may find yourself paying over mileage charges at the end of your lease.

Leasing is similar to renting a home, you are constantly paying money, and in the end, you have nothing to show for it. Although a car is not an investment, purchasing a car gives you the option to pay it off and stop having a car payment for a few years. You can sell the car and get some money for it when you are ready to buy a new car. In some cases, you can break a lease without penalty. 

How Can I Save Money on a Car?

The way to save the most money on a car is to purchase with cash. You need to be sure that you can afford any payments that you choose. Imagine what you could do with your money if you didn't have car payments to worry about. This would give you extra money to save or to have fun with. You will save money by buying a good reliable used car and by taking proper care of the car.

When you purchase a used car, take it to a mechanic you trust and have it inspected so that you know you are buying a sound car.

Take time to research the model of the car and research the car title, especially if you are buying from a private seller. 

If you can't pay with cash make sure you don't take out car payments you can't afford. Generally, you need to be able to pay off the car within three years. Your total monthly debt should be less than twenty-five percent of your current income. If you stick within these parameters, you will be in a much better situation financially. If you do not qualify for a car loan, you may have to buy with cash, which can limit your purchasing power. You must meet the same credit qualifications if you lease or buy.

You may want to consider joining a car share while you save up cash to purchase your car.