Leasing a vehicle is a way to use a car for a fixed period of time in exchange for monthly payments. Unlike purchasing a car, leasing a vehicle allows you to use the car for a specific term, typically 2-4 years, and return it to the dealership at the end of the lease term. During the lease term, you are responsible for maintaining the car and keeping it in good condition.

Although you would be leasing rather than buying, the negotiation process starts with the price of the vehicle and not the monthly payment. Too many potential buyers who walk into a dealership focus on monthly payment first and forget about negotiating the price of the vehicle down before anything else happens.

The monthly lease payments are based on the difference between the vehicle’s purchase price and its residual value at the end of the lease, as well as other factors such as the lease term, interest rate, and any fees. Leasing can be a good option for those who want a new car every few years and prefer lower monthly payments compared to buying a new car.

When Does It Make Sense to Lease a Vehicle?

Leasing a vehicle can make sense for people who want to have a new car every few years, prefer lower monthly payments, and don’t want to deal with the hassle of selling or trading in their car. It can also make sense for those who want to drive a more expensive car than they could afford to purchase outright. Additionally, if you use your car for business purposes, you may be able to deduct some or all of the lease payments as a business expense.

Consult with your tax advisor on any deductibility. However, if you plan to keep the car for a long time or want to customize the vehicle, buying may be a better option. It’s important to weigh the pros and cons of leasing versus buying and consider your personal preferences, budget, and driving habits before making a decision.

When Does It Not Make Sense to Lease a Vehicle?

Leasing a vehicle may not make sense for people who:

1. Drive a lot: Lease contracts typically come with mileage limits, and exceeding the limit can result in expensive fees at the end of the lease term. If you drive more than the mileage limit, it may be better to purchase a car.
2. Want to customize the car: Since you have to return the car at the end of the lease term, you can’t make any modifications to the vehicle. If you want to personalize or modify the car, buying may be a better option.
3. Are on a tight budget: Lease payments may be lower than loan payments, but you don’t own the car at the end of the lease term. If you’re on a tight budget and can’t afford to make monthly payments indefinitely, buying may be a better option.
4. Want to build equity: When you buy a car, you build equity over time, which means you can eventually sell the car or trade it in for a new one. With leasing, you don’t build equity since you don’t own the car, so if building equity is important to you, buying may be a better option.

Can I Buy My Vehicle at the End of the Lease?

Yes, in most cases you can buy your leased vehicle at the end of the lease term. This is known as a lease buyout. A lease buyout can be a good option if you’ve grown attached to your car or have exceeded the mileage limit and don’t want to pay additional fees.

There are two types of lease buyouts:

1. A lease-end buyout: At the end of the lease term, you have the option to buy the car for its residual value, which is the predetermined amount stated in your lease contract that the car will be worth at the end of the lease. You can pay the residual value in cash or finance it like a regular car loan.
2. An early buyout: Some lease contracts allow you to buy out the car before the end of the lease term. The price for an early buyout is generally the sum of the remaining lease payments and the residual value plus any applicable fees.

It’s important to note that buying out a leased car may not always be the best financial decision. The residual value may be higher than the car’s market value, and you may be able to find a better deal on a similar used car. Sometimes, however, the residual value is below the market value making your decision a little more difficult. Before deciding to buy your leased car, you should do your research and consider all of your options.

Are There Hidden Costs Associated with Leasing a Vehicle?

Leasing a vehicle can come with several hidden costs that you should be aware of before signing a lease contract. Some of the most common hidden costs of leasing a vehicle include:

1. Mileage fees: Lease contracts typically come with mileage limits, and if you exceed the limit, you may be charged a fee for each additional mile you drive. The fee can range from 10 to 30 cents per mile, so it’s important to consider your driving habits before signing a lease contract.
2. Excessive wear and tear fees: When you return the leased vehicle at the end of the lease term, you’ll be charged for any excessive wear and tear on the car. This can include things like dents, scratches, or interior damage. To avoid these fees, you should take good care of the car during the lease term.
3. Disposition fee: Some lease contracts include a disposition fee, which is a fee charged by the leasing company to cover the costs of inspecting and reselling the car after you return it. The fee can range from $300 to $500.
4. Early termination fees: If you need to end your lease contract before the end of the lease term, you may be charged an early termination fee. The fee can be significant, so it’s important to understand the terms of your lease contract before signing.
5. Gap insurance: In the event of an accident or theft, your car insurance may not cover the full value of the car. Gap insurance can help cover the difference, but it can add to the cost of leasing.

It’s important to read the fine print and understand all of the terms and fees associated with leasing a vehicle before signing a lease contract.

What Happens If I’m In an Accident with My Leased Vehicle?

If you wreck a leased vehicle, the first thing you should do is contact your insurance company to report the accident. Your insurance policy should cover the cost of repairing or replacing the leased vehicle, up to the limits of your coverage.

In addition to filing an insurance claim, you should also notify the leasing company of the accident. Depending on the terms of your lease agreement, you may be required to pay for any damages not covered by insurance, including the cost of repairs and any decrease in the car’s residual value.

If the vehicle is a total loss and the insurance payout is not enough to cover the remaining lease payments and fees, gap insurance may help cover the difference. However, gap insurance is typically an optional coverage that you must purchase separately, so it’s important to check your policy to see if you have this coverage.

Summary

It’s important to read and understand the terms of your lease agreement before signing, as it may include specific provisions related to accidents and damages. If you have any questions or concerns, you should contact the leasing company for clarification.

It’s also important to consider your personal circumstances, lifestyle, and financial goals when deciding whether to lease or buy a car.

Leasing isn’t for everyone. Most people buy their vehicles as supported by the fact that only about one-fifth of new cars were leased in 2022 in the United States. But, that doesn’t mean that leasing isn’t a viable option for you. Do your research and know your situation well before negotiating a lease.

Whether you lease or buy, some large retailers, such as Costco, offer auto programs that provide discounts or specials well worth using. For example, Costco offers discounts on certain brands of vehicles from time-to-time. You have to be a member to participate but the discounts generally far exceed the cost of your membership.