Leasing a car can be a good option for some people, but it’s certainly not for everyone. Leasing comes with fees for breaking the lease early, mileage caps, and responsibility for maintenance costs. And while leasing may seem cheaper at first, you’ll likely have to pay higher interest rates and insurance premiums with a leased vehicle.
If you’re in the market for a new car, you may be considering leasing a vehicle instead of financing one. Leasing a car is the process of paying for time spent driving a vehicle, instead of investing money toward ownership. Lessees get to enjoy a new car during their lease agreement and give the car back once the contract has expired.
While this may seem like a good deal, there are many disadvantages to leasing that consumers should be aware of before signing on the dotted line. Keep reading to learn why leasing a (new or used) car may not be the best decision for you or your finances.
How leasing a car works
Leasing a car involves paying for a vehicle that gets returned at the end of a lease term. The lessee pays for their time using the leased car without owning the car outright or indefinitely.
Typically, a financing company purchases a car from a dealer. Then the leasing companies rent out the cars to you, the consumer. The leasing company places a set of restrictions on the lease agreement, including monthly payments and specifications regarding usage.
Since you don’t have a car loan to pay off, leasing a car can be a nice way to pay less per monthly payment. However, there are several downsides that come with leasing as well.
10 reasons not to lease a car
Buying versus leasing a car is a big decision, and what works for one consumer may not work for another. As with any financial purchase, it’s important to weigh the pros and cons of every scenario. Before you decide to lease a car, take a look at these downsides first.
1. Mileage limit
Per the lease contract, you’re allotted a certain number of miles you can drive per year. If you go over your designated mileage cap during your lease period, you can expect to be charged extra mileage fees. These mileage restrictions are put in place by the leasing company.
For someone who doesn’t drive much, this might not seem like a big deal. But if you drive to and from work daily, you might find the mileage cap a hinderance.
2. Fees for breaking the lease early
The lease terms generally span a couple years, in which you’re obligated to make monthly payments on your car lease. If you decide that leasing a car is no longer what you need, you may consider breaking your contract early.
Unfortunately, deciding to end the leasing agreement before the lease expires will leave you with a large bill owed to the leasing company. You can expect to spend money toward the rest of the owed balance on the auto lease, as well as large early-termination fees.
3. Lease terms stand after an accident
If you experience an auto accident and the car is totaled, you are still responsible to fulfil the terms of the auto lease. Gap coverage can help cover these costs, but without it, you’ll be left paying a hefty sum to the leasing company for a car that you can’t drive.
4. Limited car customization
When you own your own car, you may enjoy customizing it to your personal liking. This could include window tinting, car magnets or bumper stickers, or even performance-improving changes.
When you lease a car, leases limit the customizations that can be done. This includes car tuning to enhance the vehicle’s performance. The dealer expects the car to be returned as it was initially leased, with only expected wear and tear.
5. Maintenance costs
When you lease a car, you are assuming all the risks associated with maintenance and repair. The car must be returned in the same condition as it was originally leased. During your lease term, you are responsible to pay maintenance costs, not the lessor.
There is some wiggle room for general wear and tear, but if the car is returned with excess wear when it’s time to trade in, you could be hit with additional fees and penalties.
6. Higher overall cost
A leased car will usually come with lower monthly payments compared to purchasing the same car with an auto loan, which is generally seen as a perk of leasing a car.
However, in most cases, leasing a car will be more expensive in the long run compared to buying a car and financing it with a car loan. This is because you are only paying for the use of the vehicle during the lease term rather than the entire value of the vehicle.
To get a better idea of what current auto loan rates look like, take a look at some of the car loan options below.
7. Limitations on personal use
Some leases may have restrictions on how you can use the vehicle, such as prohibiting commercial use or restricting the types of roads you can drive on. In general, leasing a car often offers less flexibility than owning a car, as you may be limited in terms of how long you can keep the vehicle and what you can do with it.
8. High fees and auto insurance
Car insurance premiums tend to be higher with most leases. Dealers typically require lessees to carry higher limits of full cover insurance compared to a car that you own.
Additionally, depending on your state’s requirements, you may be paying more to register a leased car. The insurance company and registration fees can add quite a bit of money on top of your lease cost.
To see how leased vehicle insurance premiums compare to those of a purchased car, use the comparison tool below.
9. Payments don’t go toward a new car
Leasing a car means you drive it for a period of time, per the lease terms, then give it back. In essence, you walk away with nothing and have to start over with a different car (and new lease, if you choose to). All those payments benefited you for a short period of time but were not beneficial long-term.
Cars are considered assets, and when leasing, you’re not adding to your personal wealth or building equity in your car.
10. You spend money on something you’re returning
Finally, leasing a car means that your money is not invested wisely because it’s only going to lease payments. Car leasing comes with a low monthly payment, but the car is returned at the end of the contract, per the lease terms.
The car is not your property, and therefore can’t be traded in or used to purchase another car. You’re paying to drive the car during your lease, not to obtain ownership. Similar to renting, leasing a car means spending thousands of dollars on something that is not yours.
Additionally, when returning your car after the lease term expires, you may be subject to a lease disposition fee. This is the turn-in fee, which is money that covers any cleaning the dealer has to do in order to get the car back to mint condition.
What to know before leasing a car
When considering car leasing as a way to get your next vehicle, there are a few things to think about before signing the contract. For starters, saving for a down payment can help reduce the amount you need to lease. A down payment may not be mandatory, but it can help you save money on monthly costs.
It is important to know the overall cost of the car during the lease agreement, not just the monthly payment. Since monthly payments tend to be lower than financing a car, it may be tempting to pull the trigger before reading the fine print.
Credit score requirements
Similar to financing a vehicle or getting a personal loan, there are credit score requirements for leasing a car. When a credit check is performed by the finance company, it will be determined if they are willing to take on the financial risk of providing the consumer with a car lease.
If you have poor credit, there is a possibility to lease a used car. These options are typically better for those who have poor credit and desire an even lower monthly payment.
Leasing vs. financing
The process to lease and purchase a vehicle are similar, but there are some key differences between these two options. Knowing the pros and cons of purchasing versus leasing a car can help you decide which option works best for your needs.
|Pros||• Get a different car each lease term|
• Does not require a down payment
• Lower monthly payments than financing
|• You own the car after paying down the loan|
• Usually cheaper in the long-run
• Doesn’t matter how long you drive it or how much wear and tear it goes through
|Cons||• Must return the car at the end of the term|
• Typically more expensive in the long-term
• May need to pay additional fees if the car takes on more wear and tear
• Mileage cap
|• Have to stick with one vehicle until you trade it in or sell it|
• Higher monthly payments
• Typically requires a down payment
Is leasing a car ever a good idea?
Even though we’ve listed several downsides to leasing a car, some people can actually benefit from having a leased vehicle. When you’re looking to drive a shiny new car regularly, leasing may be a good option for you. Additionally, if you’re looking for lower monthly payments, leasing may be for you.
If you’re a self-employed small business owner, leasing a car for business use may come with beneficial tax deductions. You can itemize your car’s expenses or track mileage for tax purposes.
Be sure to work with a tax professional when using a vehicle for small business purposes, so you can maximize your deductions and ensure your taxes are being handled properly.
What is included in a car lease deal?
A lease agreement is a contractual document that outlines the terms and conditions set forth by the leasing company. The lease agreement will contain mileage limits, length of time for the lease, and information regarding monthly payments.
The agreement should also include additional fees and charges, including the excess wear and tear fee, disposition fee, acquisition fee, and early-termination fees. In addition to these fees, the document will provide maintenance and use standards as well as an excess mileage penalty. Information regarding extending your leased car, purchasing the car, or returning it will also be included in a lease agreement.
How much does it cost to lease a car?
The cost of leasing a car varies greatly and depends on the car’s price and the length of the lease. Cars depreciate in value and with a lease, you’re only paying for the depreciation of the vehicle, not the purchase price. This is why leased vehicles tend to have lower monthly payments.
What happens if a payment is missed?
Missing payments on your lease is a breach of the lease and can negatively impact your credit score. The finance company or dealer may repossess the vehicle, although you may be able to reinstate the lease after satisfying the overdue payments.
- Leasing a car is similar to renting a home since any monthly payments you make simply let you keep renting. Unless you purchase the car before or after the lease agreement ends, you don’t retain ownership over the property.
- The mileage cap, high interest rate, and limited customization restrictions are just a few downsides to leasing a vehicle.
- Despite this, there are some benefits to car leasing, including some tax deductions for business owners that lease a car for work purposes.
- A lease agreement contains everything you need to know about your lease terms, including fees, length of the lease, and early buyout penalties.
View Article Sources
- Financing or Leasing a Car — Federal Trade Commission
- Leasing a Car — Los Angeles County Consumer & Business Affairs
- What is the Best Time of Year to Lease a Car? — SuperMoney
- Lease a Car With No Credit or Bad Credit — SuperMoney
- Can You Lease a Car and Then Buy It? — SuperMoney
- Can You Lease a Used Car? — SuperMoney
- Buy or Lease? What to Know Before You Decide on Your New Ride — SuperMoney
- How to Buy Out a Leased Car in 5 Steps — SuperMoney
- 10 Main Differences Between Leasing and Buying a Car — SuperMoney
- Lease or Buy a New Car — Which Is Better? — SuperMoney
- The Potential Tax Benefits of Car Leasing vs. Buying — SuperMoney
- Can You Buy a Car Before The Lease is Up? — SuperMoney
- Best Checking Accounts for Teens — SuperMoney
- Best Savings Accounts for Kids — SuperMoney
- Capital One Money Teen Checking Account — SuperMoney