Is Leasing a Car a Good Idea? 7 Tips You Need To Know

Lease a car

When looking for a car, your initial reaction could be to purchase. However, there is another option that may be worth considering: leasing.

When opposed to buying, leasing has several different pros and downsides, so whether or not leasing a car is a smart option depends on your specific personal circumstances, driving habits, and financial status.

How Does Leasing a Car Work?

The decision of whether to lease or purchase a car is comparable to the decision of renting vs. owning a property. Renting or leasing may be more financially feasible on a monthly basis, but it may necessitate certain sacrifices you would not make otherwise.

When you acquire a car, you have complete freedom to utilize it any way you see fit. You’ll also be responsible for any service or repairs that aren’t covered by the guarantee. If you finance a car, you will own it outright after your loan is paid off. When you no longer need it, you may sell or exchange it.

When you lease a car, you don’t own it; instead, you pay a price to drive it for a specific period of time, usually two to four years. You sign a lease agreement with the lessor, usually via a car dealership, and you may be required to pay an initial charge. However, this charge is often significantly lower than the down payment required to finance a vehicle or the cost of purchasing a car outright.

During your lease, you will make monthly payments for a certain amount of time and will be required to follow specific conditions outlined in the lease agreement. For example, you may be restricted in the number of miles you may drive the car each year, and you may be charged if you exceed that restriction. The leasing agreement will also state what is covered by warranty and who is responsible for maintenance and service for costs not covered by the warranty. In certain leases, the lessee is liable for these costs, but in others, the lessor is. You should constantly make sure you understand what you are and are not financially accountable for.

When your lease expires, you must return the car and maybe be charged extra costs by the dealership or lessor. You can be offered the choice of buying your lease or leasing another car. According to the Federal Trade Commission, if you return the car with damage that exceeds what is deemed normal wear and tear, you are financially liable for the repairs.

What Are the Advantages of Leasing a Car?

Some drivers may be interested in leasing a car because of the following possible benefits:

  • Cheaper monthly payments: Because monthly payments for a car lease are often lower than monthly payments for a car loan, leasing may result in paying less money each month to drive the same car. According to Experian’s State of the Automotive Finance Market report, which was released in the second quarter (Q2) of 2020, monthly lease costs for the ten most-leased car models are $102 less than loan payments (with some being as much as $150 to $200 less).
  • Smaller down payment: Car leases often demand an upfront charge, but it’s generally less than what you’d spend for a down payment on a car loan. If you don’t have a lot of money, leasing might help you get a vehicle sooner.
  • Buying a new car: If driving modern cars is essential to you, leasing may be a better option than purchasing. Because leases are typically just two to four years long, you may regularly switch to new cars with the most up-to-date safety and technological features. You can test drive various cars more regularly, and since the cars are younger and you have only had them for a few years, they may be less prone to mechanical troubles.
  • Reduced annoyance: If you possess a car and no longer want or need it, you must sell or trade it in, which may be a nuisance. When you lease, you just return the car at the end of the term.
  • Costs that are covered include: The warranty on newer leased cars may cover any problems you encounter. Furthermore, under certain leases, the lessor will pay for any service or car issues that are not covered by the guarantee. This isn’t always the case, but if your lease covers these charges, you may avoid paying for car problems (though you’ll almost certainly have to pay for normal maintenance like oil changes and new tires).

What Are the Cons of Leasing a Car?

The benefits listed above may have you revving your engine to sign a lease, but there are also significant drawbacks to consider. Apply the brakes and think about the following:

  • Lack of ownership: You have no equity in the car since you do not own it. This implies that, unlike owning, you cannot sell it and recoup part of your investment or take advantage of its trade-in value. Furthermore, if you finance a car, you will ultimately pay off the loan and be free of a monthly car payment. With leasing, you’ll be stuck with a monthly payment for as long as you own the car, even if its value depreciates.
  • Restriction of use: Leases often limit the amount of miles you may drive, usually to a maximum of 12,000 to 15,000 per year. While you may be able to negotiate larger mileage limitations, these constraints might make it difficult or impossible for people who have a lengthier commute to qualify. You may also be unable to transport the car if you relocate to a different state or nation.
  • Consider the following additional costs: Leasing a vehicle comes with a slew of costs, from the initial price to the monthly payment and, in certain cases, extra fees after the lease expires. You are responsible for paying for petrol, probably some maintenance, and car insurance, which can be more expensive for leased vehicles. If you break the lease early, you usually have to pay a hefty penalty.
  • Constant vehicle switching: While the opportunity to change cars regularly might be beneficial to some, it can be a significant headache for other drivers to have to go through the process of moving cars every couple of years.

When Is It Better to Buy a Car?

Whether to purchase or lease a car is ultimately a personal choice. If you place a high value on driving a new or fancy car and constantly upgrade to the most recent models, leasing may be a good option for you. However, if you’re comfortable with having one solid car that you remain with for the long haul, buying a car may make more sense.

It also makes more sense to buy a car if you want to accumulate equity in it and use it as an asset. Leasing may be less expensive in the short term, with a lower down payment and smaller monthly payment, but it does not provide the advantages of ownership.

When you possess a car, you may sell it or trade it in for another vehicle. If you play your cards well, you may earn enough money selling a vehicle to avoid having to finance the next one (or can at least reduce the size of a necessary loan). Leasing leaves you with no equity in the vehicle and might cost you more money in the long run.

What Credit Score Do You Need to Lease a Car?

A FICO® Score of 700 or higher is usually necessary to lease a vehicle, so if your credit isn’t in fantastic condition, you may struggle to qualify for a car lease. According to Credit Cadabra’s State of the Automotive Finance Market study, as of the second quarter of 2020, the average credit score of individuals who lease a new car was 729. This is higher than the 718 average credit score of people who obtained new-vehicle loans in the same quarter.

Leasing a car, on the other hand, may help you develop credit. Lessors often report your monthly payments to credit agencies in the same way that they would for a car loan. This implies that if you’re responsible with the lease, paying your monthly payments on time every time, you’ll be able to assist in repairing your credit.

Raise Your Credit Before You Lease

Whether you want to lease a car but aren’t sure if your credit score is high enough to qualify, it could be a good idea to focus on improving your credit score first. This might include working down existing debts and credit card balances, resolving charge-offs, hard inquires, and past-due accounts, and continuing to pay all of your obligations on time. You could also use Credit Cadabra Dispute Service.

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Francesca Castillo