Auto Leasing - Hot or Not?

The Low-Down on Leasing

Does it pay off?

If you’re in the market for a new car, you’re probably considering your payment options alongside various makes and models. Television ads make leasing seem easy and more affordable than financing a car, but what’s the catch?

According to SmartMoney.com, leasing a car has the following advantages:

Low down payment. You can usually talk the car dealer into a lower down payment, but of course, the larger the down payment, the smaller the lease payments.

Low monthly payment. A big lease selling point: your payments will be lower since you’re only paying the depreciation on the car rather than its full value.

The ability to switch it up. If your car is in good shape, you can simply turn it over to the dealership and walk out with something new after your lease term (two or four years) is up.

All of these factors make leasing pretty attractive in the eyes of car buyers. But what about the other side of the coin? SmartMoney offers the following disadvantages:

No equity. Much like leasing an apartment, your car payments don’t go towards owning anything.

Lack of flexibility. Lease terms come with heavy fees for early termination, as well as mileage stipulations. Most lease terms require you to drive no more than 15,000 miles per year. You may be fined for every mile exceeding the mileage specified in your lease term.

Insurance may not cover the worst case scenario. If the car is destroyed or stolen during your lease term, your insurance may only pay for the car’s market value—which may not cover what you owe on the lease. You’ll need to purchase gap insurance to ward against this.

Still not sure whether to buy or lease? Here are a few questions that will help you determine the best option for you:

Are you short on cash? Sometimes situations occur that make purchasing a car a little tougher. Because leasing provides some wiggle room when it comes to down payments and yields lower monthly payments, leasing may be a good option for you. (Of course, the flip side is that buyers use leasing as an excuse to buy out of their budget.)

Do you travel a lot? Run carpool? If so, leasing probably isn’t a good option for you. At the end of your lease term, you’ll be charged for extra mileage, as well as any wear and tear on the vehicle. Alternatively, if you rarely drive, you may be paying more for depreciation than you’re actually causing.

Will you use the car for business? Remember that interest on a car loan is not tax deductible. But, if you lease, you will be able to deduct a portion of your car’s depreciation on your taxes.

Can you foresee major life changes in the near future? If so, a lease probably isn’t in your best interest. Whatever cash you save with a low down and monthly payment may be obliterated if you have to terminate your lease early.

Leasing a car isn’t for everyone. If you’re considering it, make sure you evaluate your lifestyle and budget, and weigh those factors against the advantages (and disadvantages) of leasing. Doing a little homework now will pay off come car buying (or leasing) time.

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