car leasingIs it smart to lease a car? Is leasing a good idea? What’s wrong with it, if anything?

The answer is that there’s nothing inherently “wrong” with leasing a car. It’s a perfectly valid and popular form of automobile financing.

It’s not renting (often confused with apartment leasing). And because it’s a bit more complicated than buying a car with a loan, it’s very often misunderstood.

We often see advice from uninformed people on automotive question-and-answer forums advising other people against leasing. The reasons they offer are things such as, “it’s a dealer scam,” “it’s stupid,” “you pay all that money and don’t own the car,” “you’ll get hit with surprise charges and fees,”  or “it costs more to lease.”

There is some truth in all of those responses but it’s not as simple as that. These are oversimplified answers that create false impressions about leasing.

Let’s take a look at the real answers.

It’s true that dealers sometimes steer customers toward leasing when they realize that’s the only way they are going to able make a sale to a customer who couldn’t otherwise afford the car, even when the customer knows nothing about leasing and shouldn’t be doing it. It’s not a “scam” in the legal sense, but maybe a bit unethical if they know the customer is likely to have difficulties with the lease later. Leasing simply isn’t right for some people but dealers are not motivated to try to sort out those who should from those who shouldn’t and are often guilty of telling customers what they want to hear, even if it’s wrong. Smart car buyers will educate themselves about cars, as well as learning about the car buying and financing process before visiting a dealer.

It’s not that there’s anything wrong or “stupid” about leasing, it’s that leasing is wrong for some people. If an automobile customer doesn’t understand how leasing works, drives more that a “normal” number of miles (about 10,000-12,000 miles annually), doesn’t properly care for their cars, or will want to end the lease before its normal 2-4 year term, then leasing is “stupid” for that customer and they will have a bad leasing experience.

It’s also true that “you pay all that money and don’t own the car.” But lease payments are about half of loan payments for the same car, assuming a 3-year term, which pays for the natural depreciation of value that all cars experience. An average car will only be worth half its original value in 3 years. So, someone who buys with a loan, makes full payments but only owns “half” a car in three years (in terms of its remaining sale or trade value). To summarize, leasing payments are about half, but builds no ownership value. Loan payments are twice as much but only builds depreciated ownership value (about half in three years). Therefore, one is about the same as the other — except if the buyer likes to keep his cars for many years after the loan payoff. But, a leasing customer also has the option to purchase his car at lease-end, and drive it for many more years. This may be a bit of an oversimplification, but buying with a loan and leasing are not that much different.

The notion that “you get hit with surprise charges and fees” can also be true. If a leasing customer doesn’t know how leasing works and possibly leased when they shouldn’t have, lease-end charges for excessive mileage and damages can be a surprise. Knowledgeable leasers don’t have that problem. They know how many miles that they will be driving, based on past experience, and know that they can stay within the allowance of the lease. They also maintain their cars regularly and properly, and have dents and scrapes repaired to avoid lease-end damage charges. They also have auto insurance coverage sufficient to take care of any damages caused by an accident. They have no problems with leasing.

In response to the point that “it costs more to lease,” that is also true — from a long-term perspective. We’ve already discussed the fact that the short-term monthly cost of leasing is less than buying with a loan. However, finance costs and fees are higher , which makes the long-term cost of leasing higher than buying with a loan, especially if the buyer keeps his car for many years after his loan has been paid off.  But buying a car with a long-term loan (5-7 years), which is very common, increases finance cost and decreases trade value, which then brings the comparison of buying and leasing closer together, possibly about equal.

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