Everything to Consider Before Leasing a Car

Leasing can be a tempting option for your first or next vehicle, especially given the rising prices of new cars.

Making monthly payments to drive some of the latest models on the market or a luxury set of wheels may seem far more attractive compared to the commitment of buying.

While you’ll have no worries about what to do with the vehicle when your contract ends either – no hassle trying to sell or trade it in – there are a few disadvantages of leasing a car. As you weigh getting your next car, consider the following to decide whether leasing or buying is best for you.

How Leasing a Car Works

When leasing a car, you (the lessee) enter an agreement with a leasing company (the lessor) to use a vehicle they own for a set amount of time. Much like renting an apartment, the agreement covers:

  •  How much you’ll pay each month

  •  The length of time the agreement lasts

  •  What happens at the end of the contract

You normally have the choice between a short or long-term lease, which affects how much it costs. Short-term leases can run month-to-month, while long-term car leases usually last for at least six months.

Most people who lease a car stick with the agreement for between two and four years. When the lease period is over you can decide whether you want to renew the lease, if you like the vehicle and terms, trade it in for a different model to lease, buying the car or look at buying a different car or leasing elsewhere.

The costs of car leasing vary, with the main factors that affect the price including:

  •   The value of the car and its estimated depreciation

  •   Your credit score

  •   How many miles you plan on driving annually

  •   Interest rates

Usually, you’ll have to make a down payment or cover an acquisition fee upfront as well, like putting a deposit down to secure an apartment.

The Cons of Leasing a Car

For some drivers, leasing suits their lifestyle and budget. However, there are a few disadvantages of leasing a car that you need to be aware of, as they may make you think twice before signing on that dotted line.

Leasing is More Expensive Long-term

It may seem more affordable to lease a car monthly if you can budget to meet each payment. Yet one of the biggest cons of leasing a car is the belief that it’s the cheapest option.

You will never own the vehicle and keep making lease payments to use it. As soon as you stop paying, you lose access to the car.

While buying a car with cash or a loan may seem more expensive at first, you do eventually own it. Even with a loan, you should reach a point where you don’t have to make any more payments on the vehicle.

The longer you keep the car, the more value you get from it too – with the option to sell or trade it in.

 

High Depreciation

All cars depreciate over time, but it hits new cars hardest. The value of many new cars falls by around 20% during the first year of ownership, dropping by around 10% for each following year. 

As lease cars are generally brand-new models, a big disadvantage of leasing a car is that you pay for it during the time it depreciates the most.

This means your lease payments factor in the high costs of depreciation, so you’re paying to cover this lost value even though you won’t own the vehicle at the end of the agreement.  

 

Upfront Costs

Like renting an apartment, you’ll usually have to make a down payment to secure the lease car of your choice. How much this is depends on:

  •  Your credit score
  •  The value of the vehicle

  •  Terms of your agreement (length of contract, expected annual mileage)

Especially if you have bad credit, these can be quite high. The upfront cost is only to acquire the lease car, so it doesn’t go towards the vehicle’s equity, like it would when buying a car.

You might be hit with a disposition fee when the lease ends as well. These are essentially high admin fees.

 

Gap Insurance

Another downside of leasing a car you might not realize until it’s too late is the often large insurance costs. Many leasing companies require you to take out a higher level of insurance coverage to protect their vehicle – sometimes up to $300,000 in liability coverage – and they can enforce this as the lessor still owns the car. 

They may also require you to have gap insurance. This covers the difference between the value of a new car and the amount lost due to depreciation.

If you have a bad accident or total the vehicle, gap insurance covers the difference between its current worth and what you owe on it. Both additional insurance considerations can significantly increase your payments.

When buying a car they’re optional extras, so you can own and drive your vehicle legally, safely and affordably without considering them.

 

Surprise Fees

When you return the car at the end of your lease deal, you could face various extra fees. These range from a disposition fee to simply hand your car back, to charges for going over your agreed annual mileage limit – even if it was only by a couple of extra miles.

There might also be wear and tear charges if the car’s not in a condition the leasing company deems acceptable. Most lessors expect to get their vehicle back in the same state as it left the showroom.

If you’ve had it for a few years, this can be hard to do even if you maintained it well. 

 

Mileage Restrictions

A major downside of leasing a car is that your contract will specify a maximum number of miles you can use the vehicle for within a set period. This means you need to accurately predict how much you’re likely to drive and add in some breathing room.

If your circumstances change, such as you get a new job or move, you might end up driving more than you planned. Most leasing companies charge an excess mileage penalty – ranging from around 10 to 50 cents per mile.

It may not sound much, but it soon adds up if you do an extra few hundred miles.

 

Termination Troubles

Getting out of a lease early  can be costly and is another downside to leasing a car. Whether your circumstances have changed and you don’t need a lease car, can’t afford the payments or simply don’t like the vehicle, you’re tied into an agreement.

Most leasing companies apply early termination penalties, which can reach into the thousands depending on the length of your contract, the vehicle’s value and other factors.

Once your lease is over, you’ll have nothing to show for it and need to find the funds to buy or lease another vehicle anyway.

 

Alternatives to Leasing a Car

If the cons of leasing a car have put you off the idea but buying a new or premium vehicle is beyond your budget, there are other options. The used car market is full of affordable models that avoid the pitfalls of new car depreciation and you actually own it.

Even if you need to use an auto loan to secure a vehicle, monthly payments can be lower by making a larger down payment. You also get some of that value back when selling or trading in the vehicle, which is something more possible when buying rather than leasing a car.

There are a few other considerations, though. Many used cars aren’t covered by their original factory warranties – unless they’re relatively new or have long ones. Where a warranty is a priority, look for certified preowned vehicles.

Shop Around Before Deciding to Lease

Picking your next car is a big decision, and you must consider all available options to get it right. With more choice of models, and ways to get behind the wheel of a new car, it can be stressful, so take your time.

The disadvantages of leasing a car may mean it’s not for you and buying a preowned one could suit you better. Explore your options to find your next vehicle and shop for used cars at EchoPark