That is the question many of my clients ask.  To answer it, we first must explain what leasing really is and dispel some of the myths surrounding it.  Despite all the special terminology and complicated formulas, leasing is just a different method of automobile financing.  A traditional loan finances the purchase of a vehicle.  A lease finances the USE of the vehicle.  Each has its own benefits and drawbacks.  Leasing has become increasingly popular over the last several years due to the rising costs of new automobiles.  Leasing can also have some tax advantages for business owners (don’t ask me - talk to your accountant!).  Approximately a fifth of all new vehicles are leased today.  So, what is leasing?

Simply put, a lease a method of financing where you only finance (and pay sales tax on*) the portion of the vehicle you intend to use over a certain period of time.  Instead of financing the entire cost of the vehicle, you only finance the depreciated amount.  That depreciated amount is the difference between the selling price and the estimated residual value, which depends on time and mileage.  For example, let’s say the car you want costs $40,000 (you have good taste).  If you purchase it, then you will finance $40,000 over a certain number of years (assuming you make no down payment).  Now, let’s say that if you put a total of 36,000 miles on the car over 3 years, it will have a residual market value of $25,000.  If you lease that car for 3 years with a 12,000 mile per year limit, you will only be financing $15,000 - the depreciated amount.  The higher the residual value of the vehicle (and the lower the selling price), the better the lease deal will be.  This is why you can often get good lease deals on BMWs, Lexus, and Hondas – they tend to hold their value well over time. 

Low monthly payments are a BIG attraction, but there are many important factors to consider before deciding to lease.  Most leases these days have a term of anywhere from 22 to 39 months.  At the end of the lease, you must either turn the car in or buy it out.  If you have exceeded the mileage limits of the lease, then you will have to pay for those extra miles (typically 15 – 30 cents a mile), or you will have to roll over that “negative equity” into the lease or loan on a new vehicle.  You will also have to pay for any excessive damage to the car, above and beyond the small scratches and chips in the paint that are expected on daily driver.  The leasing company may also charge a “disposition” and/or other fees that must be paid at the end of the lease.

So, should you lease or not?  Most experts will tell you that leasing is not a good option for most people, because most people cannot accurately predict how many miles they drive per year.  Even if you do know how many miles you drive, is your living and working situation stable enough that your annual mileage is likely to stay the same for the next few years?  If it is (or if you have another vehicle you can drive), then leasing could be a good option.   Otherwise, it’s not.  Sounds pretty clear cut, huh?  Well… may not.
 
Traditional loan terms have gotten longer and loan terms of 60, 72 and even 84 months are becoming common place.  Furthermore, interest rates are at historic lows.  This allows people to get lower monthly payments with traditional financing, closer or even equal to those of a lease.   Most people today are financing their vehicles for 60 months or more in order to get those low monthly payments, yet relatively few of these people actually keep their cars until that loan is paid off.   That means than when they go to trade in the vehicle for a new one, the trade in value is less than what they still owe.  They either have to pay the difference in cash or roll the negative equity into the new loan, just as if they had exceeded the mileage on a lease.   The advantage of traditional financing is that you have the OPTION of keeping the car and paying off more of the loan, until you no longer have negative equity in the vehicle. 

So, what’s the best option?  Well, the financially prudent thing to do when buying a car is to make a significant (10-20%) down payment, finance the vehicle for no more than 48 months, and keep it until it dies.  But what fun is that?  If you are like me and are seduced by the beauty of new cars every few years, then you might consider leasing.  Leasing may also be a good option if the vehicle is new in the marketplace, and you don’t know how well it will hold its value over time.  Leasing puts much of the depreciation risk on the leasing company, not you. 

The bottom line is that the decision to lease is not an easy one, and it depends on your unique financial and living situation, driving behavior and priorities, and prevailing interest rates.  Feel free to contact a Women’s Automotive Solutions consultant to help you decide if leasing is right for you, or try Edmunds.com “Decision Calculator” and see how much leasing or buying will cost for the same car.  If you do decide to lease, try to take at least some of the money you are saving on the monthly payments and put it into a savings or other short-term investment account.  Let that money earn a little interest!  At the end of the lease, you’ll have some extra cash if you need to pay for excess mileage, make a down payment on a new vehicle, take a vacation, or whatever else you are saving up for!
*In many states, including North Carolina, you only pay sales tax on the monthly payment amount when you lease.   In other states, the leasing laws are different.  Be sure to check the laws in your state before considering a lease.