Leasing a Car: How to Be Smart About It

Most of the time, leasing a car should be one of the last options for aspiring car owners. Even purchasing a car is a losing proposition; you’re spending a significant amount of money for an asset that depreciates, even as it transports you from point A to point B. In most cases, leasing just makes the situation worse.

As a lessor, you’ll have to keep your car in excellent shape and potentially limit how much you use it. And at the end of the lease period, you’ll have nothing to show for your money!

Leasing a car is like renting an apartment: you’re paying for the privilege of using it, but ultimately gaining no equity.

You’ll notice, however, that this article’s headline implies there is a way to be smart about leasing a car. It’s not always the worst option when you’re looking to obtain a vehicle. In a few cases, in fact, leasing can be at least as financially viable as purchasing a new or used car. In some cases, you can even come out ahead.

Defining a Lease

At its core, a lease is a way to drive a vehicle by making the lowest possible monthly payments on it. Sometimes, it’s even possible to lease a luxury vehicle for less each month than it would cost you to to purchase an economy cars.

Why is a lease so cheap per month? When you lease a car, you’re effectively “renting” an automobile. You’ll own no part of the car, and every dollar you put into your monthly lease payments gives you nothing back in terms of car equity.

Compare purchasing and leasing: When purchasing a car, at some point you’ll own it and can drive it for purely the cost of fuel and insurance. When leasing, you’ll never own a car, and you’ll make monthly payments as long as you use the car. You can see how, over time, constant lease payments begin to exceed the cost purchasing a car and eventually paying it off.

Just like when you rent an apartment, lease contracts mean you have to take better care of what you’re driving. A lease will often include mileage limitations, so that you can only drive so many miles per year, and the lease may carry penalties for wear and tear beyond normal use. You’ll also never be able to modify the car if you’re so inclined. Finally, just like most apartment leases will charge you extra for breaking your lease early, car leasing terms include penalties if you want to return the car before the contract expires.

When to Lease

If you can satisfy most of these requirements, a lease might be an option for you:

  • Responsible car owner — you can take good care of your car without damaging the interior and exterior
  • Low-mileage driver — you drive fewer than 10-12,000 miles per year
  • No/low down payment you don’t have a substantial amount to put towards a car
  • Low monthly cash flow you simply don’t have room in your budget each month for a large car payment

Even if you’ve checked those boxes, you should still strongly consider financing a used car. You can nearly always find a used vehicle to purchase for the same monthly price point as a lease, and then you’ll be building equity in something that will be valuable to you later on.

So, under what scenarios does it make sense to lease a vehicle? When can you lease and still come out ahead financially?

Leasing for Business

Business use of your car can be deducted for tax purposes. This applies to both purchases and leases. In fact, if you use a car exclusively for business, you can deduct the entire cost of operating the vehicle. If you’re purchasing a car and using it for business purposes, you’ll be able to deduct its depreciation, but there are difficult limits imposed by the IRS if your car is considered a luxury vehicle.

The IRS also defines luxury vehicles very poorly, and most cars you consider purchasing will fall firmly into that category, making the tax benefits of purchasing a car for business less appealing. The beauty of the lease when it comes to business expenses are that the car can’t depreciate since you aren’t actually purchasing it. Thus, you’ll simply be deducting your business usage percentage of your lease payments. If your car’s business use percentage is 75%, you can deduct 75% of your lease payment. There are (much smaller) limits when it comes to luxury cars, and, in fact, as a car’s value rises, leasing becomes more attractive.

One other tax component to mention when it comes to using cars for business purposes is that there may be taxable gain or tax-deductible loss when you dispose of a car. When leasing, since you’re returning the vehicle to the dealer, you’ll incur no such taxes, either positive or negative.

Leasing for Pleasure

This is much more of a grey area, but leasing can be the right choice for people with a certain mindset or set of values. When leasing is your choice, you’ll end up with a new car every few years. This can be attractive for car enthusiasts, since you’re not stuck driving the same car for five or ten years.

Leasing also means that you have less to worry about when it comes to maintenance and features. You’ll always have a newer vehicle with a lower chance of failing. As cars get older, maintenance costs can also slowly drive people crazy, so there’s a certain value that you might derive from the peace of mind of a newer vehicle.

If you’re considering any of these reasons, you should ask yourself difficult questions. It’s impossible to place a dollar value on the perceived pleasure you might get from leasing a newer car, but leasing is still in nearly all cases a worse deal financially than purchasing a car. If, however, you feel strongly about some of these values, or if you’re in a position where owning a newer car carries significant value, the argument to lease is a bit easier to swallow.

Rare Lease Deals

Car manufacturers will occasionally offer incredible lease incentives worth taking advantage of. One notable deal late last year was for the BMW i3, which could be leased at just $130 per month with $0 down. This was possible in California through heavy incentives programs and certain BMW incentives that individuals qualified for.

Sites like leasehackr.com do a great job of indexing these deals and providing more information on the value of leasing a car, so it’s worth keeping tabs there if you’re potentially interested in a lease.

Overall, a lease generally remains a poor financial decision, but it can be the right move for certain people. If you simply can’t afford a larger down payment, or need the monthly cash flow that a lease provides, it can be the right fit. Think carefully, however, about the long-term implications of leasing a vehicle, and the lack of equity that you’re building in what is essentially a box with wheels.

Topics: cars

3 Responses to “Leasing a Car: How to Be Smart About It”

  1. Shay Hass

    I think leasing might be the way to go if leasing an electric car. with all the advancements in technology, one might not have much of a resale value after three years. That is why we are considering leasing our next electric car, the BMW i3.

  2. I agree that leasing is generally a poor financial decision. My father continues to always lease cars, mainly because he once bought a lightly used car, and it was a mechanical disaster. I constantly try to show him the pros and cons of leasing, but to no avail. Maybe I’ll show him this post! 🙂

  3. Very few people actually keep their car until it’s completely paid off. If you are one of those people, then a lease may make sense.

    If you’re going to buy, I think 2 or 3 model years old is the best bet, because it took the biggest hit on depreciation up front. If you are going to drive a car for 5 years or less, then I’d lease. If you are a crazy low mileage driver, then leasing may be great too.

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