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3 Things to Know Before You Lease a Car

Lease a Car

3 Things to Know Before You Lease a Car

You may have seen ads trying to convince you to lease a new car with a low monthly payment — much lower than if you financed the same vehicle.

If you need a new car but money is tight, leasing might seem like an attractive option. But is it right for you?

Money expert Clark Howard has been helping people make wise financial choices about their vehicles for years. And he has strong feelings about leases.

In this article, we’ll lay out how car leases work and why Clark is almost always against them. We’ll also look at the two specific cases where Clark says it may be okay to lease.

1. How Is Leasing a Car Different From Buying?

The primary difference between leasing and buying is who owns the vehicle. When you lease a car, you make monthly payments in exchange for being able to use the vehicle for a certain period of time, but it does not belong to you. The leasing company owns the car and is essentially renting it out to you.

3 Things to Know Before You Lease a Car

You will usually have to pay a certain amount of money “due at signing” for the privilege of taking out the lease. Lease terms are typically anywhere between 24 and 60 months or two to five years. When you sign a lease for a vehicle, you commit to making payments for that period.

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Once you get the car, there is often a cap on the number of miles you can drive the vehicle. If you exceed that cap, you’ll have to pay a per-mile penalty. If you want to end the lease early, you will likely pay a penalty.

At the end of the lease period, you may have the option to purchase the vehicle outright for a price that was determined when you signed the lease. Sometimes you can negotiate that down to a lower number.

3 Things to Know Before You Lease a Car

When you buy a car, you either purchase it outright for the price you and the dealer agree on and own it entirely from day one, or you finance the vehicle through the dealer or another financial institution. The finance period is typically 24 to 84 months, or two to seven years. If you finance the vehicle, once you’ve made all of your monthly payments you will own the car outright.

To get an idea of what leasing a vehicle versus purchasing it might cost, here are sample offers on a 2020 Honda Fit.

3 Things to Know Before You Lease a Car 1 3 Things to Know Before You Lease a Car 23 Things to Know Before You Lease a Car 3

The lease and financing terms are from Honda’s website. The sale price is from a Honda dealership in Chamblee, Georgia in June 2020. Here’s how the numbers work out.

 Due At Signing/Down PaymentMonthly Payment Amount
# of MonthsTotal Cost
Own Vehicle?
Lease$2,199$16936$8,283No
Finance at 1.9%
$2,199$45036$18,399Yes
Purchase Outright$17,945NANA$17,945Yes

As you can see from these sample offers, there are three options:

  • Lease the car for 36 months (three years) at $169 a month and spend $8,283. But at the end of the period, you do not own the car unless you work out a way to buy it from the dealer by paying additional money.
  • Assuming your credit is good enough to qualify, you could finance the Fit for 36 months (three years) at 1.9% interest. This means that with a monthly payment that’s $281 more than the monthly lease payment, you could own the car outright at the end of those three years.
  • If you pay for the Fit in full at the outset, you own it outright from day one.
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2. What Are The Downsides of Leasing a Car?

The downsides of leasing are primarily financial: the lease terms, mileage allowances, wear and tear assessments, and insurance issues.

As you can see from that exercise, it really doesn’t make much sense to lease a vehicle if you can afford to finance it or purchase it outright.

“For the most part, leasing is a disaster for you,” money expert Clark Howard says.

“I know you may be lured by the prospect of driving a late model vehicle with all the newest technology and bells and whistles, but that long-term rental never becomes yours! That means to get from Point A to B, you’re locked in a perpetual cycle of debt,” he says.

He cites the numbers not working out in your favor as just one example of leases being a bum deal for most people. Other potential drawbacks to leases include:

Low Mileage Allowances

According to a 2018 study by the U.S. Department of Transportation Federal Highway Administration, the average American drives 13,476 miles per year. If your lease includes a yearly allowance that’s lower than that and you exceed the allowance, you could end up paying hundreds of dollars in overage fees. Those fees are typically around 20 cents per mile.

Excessive Wear and Tear Assessments

If the car you lease suffers any damage beyond what would be expected with normal use, you may have to pay for repairs when you turn it back in to the dealer. Depending on the severity of the damage, this could add hundreds or even thousands of dollars to the cost of your lease.

3 Things to Know Before You Lease a Car

Insurance Complications if the Car Is Totaled

If your leased vehicle is totaled in an accident, you could be responsible for a giant difference between the amount the insurance company will pay and the stated residual (what the dealer says the car is worth) in the lease. Ask the dealer when you lease for free gap insurance to protect you.

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3. When Does Leasing a Car Make Sense?

All of that said, Clark has identified two cases where it might make sense for you to lease a car. They are:

You Feel Like You Must Drive the Latest & Greatest Vehicle

Some drivers see their car as a status symbol. They like to lease because they want a fresh set of wheels every few years. Clark says in this case, leasing makes sense if you can afford it — as long as you’re swapping out vehicles only every two or three years.

Your Lease Is Heavily Subsidized

Clark doesn’t like to pass up a good deal. Some automakers will try to improve the attractiveness of their vehicles through generous leasing deals. It’s one way for car manufacturers to save face when models don’t sell as quickly as they’d like.

But smaller mileage allowances can sometimes be part of these deals. Again, you don’t want to get stuck paying ridiculous money for driving more than is allowed in the terms of your lease.

Final Thought

Dealers are constantly tempting potential customers with lease deals, but you should beware. Unless you meet the qualifications above and are willing to take a financial hit, buying is almost always a better option than leasing.

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