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The Drawbacks to Leasing a Car

20
May

Buying a new vehicle can be a very stressful event. Comparing makes and models, dealing with overanxious salespeople, and negotiating a good price can turn something pleasurable into something that seems like drudgery. After you have decided on a car, worked with the salesperson, and determined a good price, there is one more decision you need to make. Should you lease or buy? Which is the right choice for you?

Leasing is similar to renting; monthly payments must be made for the life of the contract. These payments are comprised of the interest rate of the lease and the depreciation of the value of the car. When leasing a vehicle, the out-of-pocket costs are less than if you buy. There is usually little or no down payment and no upfront sales tax when you lease. The monthly payments are lower, the cost of maintenance is less, and you get the benefit of driving a new car every few years.

However, before you decide that leasing is the best option, it is important to understand that there are some major drawbacks to leasing a car. Knowing these disadvantages and deciding if they outweigh the benefits can help anyone make a more informed decision when shopping for a new vehicle.

Early Termination

Early termination of a lease can be rather costly. If you decide to terminate the lease, you may have to pay an early termination charge to satisfy your lease obligations. If the early termination is due to a totaled or stolen car, the insurance payouts are often less than the remaining balance on the lease. This extra money still needs to be paid. Most leasing companies offer built-in gap insurance that will cover some or all of this difference. The earlier you terminate the lease, the higher the charge will be.

Insurance Cost

Many leasing companies require the driver to carry higher amounts of insurance than the minimum requirements in a particular state. Prior to leasing a car, find out what the insurance requirements are and get an estimate from your insurance company. Knowing the amounts required and the premium price before you lease will prevent costly surprises after you lease.

Credit History

If you decide to lease, the finance company will usually require a higher credit score than with conventional loans. If your credit history has a few recent bumps and bruises, leasing may not be a viable option.

Mileage Limitations

Almost all leases limit the number of miles allowed per year. This number is often 15,000 miles ( sometimes only 12,000 miles). Fees for going over these limits are typically 15 cents per mile (sometimes 20 cents or more for luxury cars). These extra fees can add up quickly; going over the limit by 5000 miles will cost you an added $750 at the end of the lease.

No Ownership or Equity

Leasing a vehicle is the same as renting a house. There is no equity and the vehicle is considered a liability instead of an asset. As long as you lease, you will always have monthly payments. If ownership is important to you, leasing is not the right option.

Surprises in the Contract

Before you sign that lease agreement, read it carefully. Many lease contracts have provisions for added fees if there is “excessive wear and tear.” Understanding these and other clauses in the contract before you sign will help you avoid surprise charges at the end of the lease.

The Long-Term Cost

The long term cost of leasing is always more than the long term cost of buying when the buyer keeps the vehicle at the end of the loan. When a buyer retains possession of a vehicle after the loan is done, the cost of the loan is spread out over a longer term. The cost of buying one car and keeping it for eight years is less than the cost of buying or leasing four cars over that same period. If finding the lowest long-term cost is the main objective, it is best to purchase a vehicle.

Though leasing can be a viable option for many people there are several drawbacks to this type of financial arrangement. Analyzing your own financial and driving situation, reading the contract carefully prior to signing, and taking some time to weigh your options will allow you to make the best possible decision.

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