Published March 20, 2013
Lease my next car?
If your clunker of a car is gasping its final breath, you are probably in the midst of deciding whether to lease a car.
There are pros and cons to either leasing or buying, but financial experts say buying and keeping a new car for the long term is usually the better deal. No matter which scenario works best for your individual needs, you should negotiate the deal, says Dayana Yochim, a consumer finance expert in Alexandria, Va.
"First negotiate the price of the car, then negotiate the trade-in value -- if you have a car to trade -- and then you can talk about how you want to finance the car," Yochim says. "Even with a lease, everything is negotiable."
Here are six things to think about before you decide: Should I lease my next car?
Is your car-buying budget tight?
If your first priority is to keep your monthly car payments within a tight budget, leasing may be the better option.
"Lease payments are typically less costly than buying a car," says Scott Michalek, a senior financial adviser with Wescott Financial Advisory Group in Philadelphia. "Your monthly payments will be cheaper, but when you walk away at the end of the lease, you won't have anything to show for it."
Michalek says leasing makes sense for someone on a very tight budget, but he warns that breaking a lease can be extremely expensive.
"If you can't afford to make your lease payments or you want to end your lease early because you are relocating, you'll pay a hefty penalty," Michalek says.
Michalek says a lease contract typically will state that all remaining lease payments are due. So, if your lease payment is $300 per month and you want to return the car six months early, you will owe the remaining $1,800 of lease payments. You'll also be charged an early termination fee, typically $200.
Some dealers may be willing to work with you on reducing these costs, but don't count on it. If you need to terminate your lease, you may want to consider transferring your lease to someone else who's looking for a short-term lease. LeaseTrader.com and Swapalease.com facilitate these types of lease transfers.
Do you have shiny or banged-up credit?
Yochim recommends checking your credit three to six months before you start shopping for a new car so you have time to correct any errors on your credit report and to take steps to improve your credit score if you can.
Michalek says bad credit will hurt whether you buy or lease a car, but it will hurt more on the lease side. "If your credit is really bad, you may not be able to lease at all, because dealers typically only lease to consumers with good credit," he says.
Even consumers with bad credit can usually finance a car purchase, although they won't get the best interest rates, Michalek says.
Pete D'Arruda, president of Capital Financial Advisory Group LLC in Cary, N.C., recommends saving money so you can make a bigger down payment and borrow less in order to reduce the interest costs.
"You may need to go down a little in the quality of the car you choose if your credit makes the cost of borrowing too expensive," D'Arruda says.
Are you a road hog or mileage hoarder?
The typical car lease imposes a penalty on miles driven above an annual limit such as 15,000 miles.
"Some leases now limit you to 10,000 miles per year, so a lease really only makes sense if you don't intend to drive the car much at all," D'Arruda says.
If you have a long commute or frequently take long-distance vacations by car, you may be better off buying.
"If you lease your car, you won't be as free to be spontaneous about road trips," says Yochim. "Look at your current driving habits, and estimate how many miles you drive per year to make sure you won't exceed the limit."
Yochim says car leases are negotiable, so you may be able to negotiate a reduction in the excess mileage penalty or an increase in the number of allowable miles. Just be sure to negotiate this at the beginning of your lease because it's unlikely you can change the terms when you turn in the car.
Diligent about car maintenance?
While it may seem like maintenance is a bigger issue for drivers who intend to keep their car for years, the truth is car maintenance is necessary for any car owner whether you buy or lease.
"Since most leases last for three years, your car will always be under warranty, so you won't face major repair bills," says Michalek. "On the other hand, if you own your car, you can scratch it, dent it and rip up the interior without worrying about it. If you lease a car, you must return it in excellent condition. Otherwise, you'll have to pay a penalty."
Michalek says a car lease may not be a great choice for a family with young children or pets because of the increased likelihood of damage to the car.
Whether you lease or own, you need to keep good records of your routine car maintenance to make sure your warranties stay valid.
"Leasing is best for fastidious people because you'll pay a penalty for every stain and ding when you return it," Yochim says.
Are you cash poor?
If you lack a car to trade in and don't have the cash for a down payment, a lease may be your only option.
"Most car dealers won't offer 100% financing and will require either a trade-in or a down payment of 10% or 20%," Michalek says. "But be careful on a lease, too, because the advertised low monthly payments usually require a down payment."
D'Arruda says consumers should never tell the dealer their car payment budget. "Negotiate the price of the car first as if you are buying it, then tell them you want to lease it," he says. "You'll get a better deal that way."
Yochim says consumers often make a down payment to reduce their monthly payments, but she says they should never put cash into a car lease arrangement.
"A lease is like long-term renting. You're not building any equity," she says. "At least if you are purchasing the car, you're not throwing away your cash on rent."
Love that new-car smell?
If you prefer to drive a new car every few years, a lease may make sense as long as you are not in danger of going above the mileage limitations, D'Arruda says.
Yochim says the best option for a consumer's long-term finances is to buy a used car that's in good shape and drive it until it no longer moves. "By buying it used, you avoid that instant depreciation of a new car. That said, it's harder right now to find a decent used car at a fair price because a lot of people have been choosing to drive their cars longer in recent years," she said.
With leasing, Michalek says most of the advantages of leasing are personal.
"If you want to drive a new car as often as possible and don't want to think about having a car that's not under warranty, then leasing is definitely convenient," he says. "Financially though, 9 out of 10 times you're better off purchasing a car and keeping it for five years or longer."