Leasing a vehicle has certainly gotten a bad reputation over the years. Many have rightfully claimed it to be a waste of money and a lost opportunity to build equity in a vehicle.
I certainly see both sides of the argument and leasing can be a lot more expensive in some cases. With that being said, leasing has a lot of advantages.
The BasicsBefore we dig into an example, let’s go over the basics. Leasing is basically renting a vehicle from a dealership. You pay a monthly lease payment for a certain amount of time (generally three to four years) at which point you can return the vehicle to the dealership or purchase the vehicle at a price that is pre-set in your lease agreement.
ProsOne big advantage is that your lease payment is typically much lower than a loan payment would be which can give your monthly cash flow more wiggle room. Also, if you aren’t sure what size of vehicle you will need (i.e. if you have a growing family), leasing can give you time to decide.
If you are a business owner and use the vehicle for business purposes, leasing a vehicle can often have more tax advantages than purchasing. I’d talk to your tax pro if you are considering this as a business owner.
ConsThe big disadvantage of leasing is that you aren’t actively building equity in the vehicle. Also, because lease payments tend to be smaller than if you buy a vehicle with a loan, this can encourage some people to get a luxury car that they really can’t afford. Leases generally have annual mileage allotments and can charge you extra once you break the limits.
Another thing to watch out for is that many dealerships require lessees to get comprehensive car insurance which might add to the total cost of leasing as well.
Good ExampleI have hesitated in the past to write about leasing because when not used properly, it can be a real damper to your long-term financial freedom. For most people, the best financial decision is to buy reliable vehicles and use them for a long time. That being said, I want to share an example of when leasing might just make sense.
This example comes from Sam Dogen, the popular financial blogger. His blog is called Financial Samurai and I highly recommend it.
Sam was looking to either lease or buy a 2015 Honda Fit for cash.
If he bought it for cash, the all-in price (taxes, fees, etc.) would be $20,117.
If he leased the FIT for three years, the total lease payments would add up to $8,462 and the price that he could purchase the car at the end of the three years would be $12,746. This means that if he purchased the car after the lease ended, the total cost would be $21,208.
If we remember, this is only $1,091 more than paying cash and for Sam, this amount was very much worth having more flexibility with his growing family. Not to mention, Sam, as business owner, was able to get added tax benefits from leasing as well. And because Sam didn’t pay cash up front, he was able to use that money to pay down the mortgage of one of his rental properties that had higher interest rates.
For Sam, leasing made a ton of financial sense. But for others, the numbers don’t add up so nicely. If you are considering leasing, make sure you understand your numbers to make sure they stack up in your favor.