Around 30 percent of new vehicles in the U.S. are leased, according to Statista. That number is up from just 17 percent in 2002. As car leasing becomes more popular, it's important for any potential car buyer or lessee to know what it means to lease a car and understand the pros and cons of leasing versus buying.
What Is Auto Leasing?
Traditionally, most Americans have purchased their personal automobiles. If they can’t afford to buy the car outright, they take out an auto loan and pay back both the principal on the loan plus interest over time. In that sense, an auto loan is analogous to a mortgage in that, once the mortgage is paid off, the buyer owns the house.
Leasing is the equivalent to paying rent on a house or apartment. Instead of taking out a loan and gaining equity in the property over time, lessees simply pay a monthly fee to use the vehicle. When the lease is up, possession of the vehicle goes back to the owner.
The Pros Of Vehicle Leasing
A handful or reasons could explain why leasing has become more popular over the years.
Lower credit requirements. In many cases, the credit score requirements for an auto lease are lower than the standards for a loan on a comparable car. Auto leases often require little or no down payment. If the car of your dreams is outside of your price range for an auto loan, you might still be able to get behind the wheel with a lease.
No depreciation. One of the most frustrating things car buyers experience is the rapid depreciation in the value of cars. Unlike houses, which have values that tend to appreciate over time, roughly 80 percent of a car’s value is gone after nine years.
Latest vehicle models. For trendy drivers who always want to be seen in the latest and greatest car, transitioning from one lease to another can be as easy as moving from a downstairs apartment to a top-floor unit. Lessees don’t have to worry about selling or trading in their vehicle.
Minimal maintenance. Lessees are almost always driving low-mileage cars that are less than five years old. On average, vehicles tend to require very little maintenance during these years, and the chances of a breakdown are minimal.
The Cons Of Vehicle Leasing
Despite the advantages of leasing, there are strong reasons why most Americans still buy.
A leased vehicle is never paid off. Lessees continue to make monthly payments forever if they just jump from one lease to the next. Once a car buyer pays of an auto loan, he or she is free to drive the car free of charge until the wheels fall off.
Maintenance costs. Both lessees and car owners must pay up for oil changes and other standard maintenance. But in the case of backseat spills, upholstery tears, paint scratches and other dings and dents that car owners are free to simply ignore, lessees often have to pay. They don’t own the car, so they are financially responsible for returning it to the owner in good condition.
Locked-in contract. While leases are typically viewed as less of a long-term financial commitment than an auto loan, they can be extremely difficult and costly to exit. Lessees who have to break their lease before it ends are often hit with steep fees and fines that can amount to thousands of dollars due all at once.
Limited customization. Car buyers are free to paint their vehicles lime green, tint their windows and install the loudest speaker system in the market. Lessees, however, must return the vehicle essentially in the condition in which it was received. If you want to pimp your ride, a lease may dramatically limit the scope of your pimping.
For Americans simply looking to make the smartest possible financial decision when it comes to buying a vehicle, the graph below indicates that there are definitely methods to time buying and selling vehicles to optimize value. The best way to maximize vehicle value is to buy a 10-year-old vehicle and sell it when it’s 15 years old. The worst approach to buying a vehicle is purchasing a new vehicle and selling it after five years.
If you want to make a wise financial decision but don’t want to buy a decade-old car, buying a new car and holding onto it for 20 years is still a relatively low-cost option compared to used car buyers with higher turnover rates.
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