According to data at Statista, about 30 percent of Americans lease their vehicle. Are they onto something good or are they making a huge financial mistake?
Letâ€™s take a look at how vehicle leases work, pros and cons of leasing a vehicle, how a vehicle lease impacts your auto insurance, and whether or not a vehicle lease makes sense for you.
How Car Leases Work
When you buy a car, with or without a loan, it is clear you own the car. And it’s clear what happens when the loan is paid off. With a lease, things work differently. Rather than owning the car, people with a lease are essentially long-term renters.
With a lease, you make a regular monthly payment for a fixed period of time. There may be some additional costs based on how many miles you drive. At the end of the lease, you have the option to buy the car at a discount or give it back to the leasing company.
While that arrangement is simple enough, the finances behind it are anything but! To make the best decision for your next car, keep these pros and cons of leasing in mind.
Pros of Leasing a Car
- Lower monthly payment – The biggest benefit many people look at with a lease is a lower monthly payment compared to buying the car with a loan. Because you donâ€™t own it at the end of the lease, you may pay less per month to â€œrentâ€ the car.
- Depreciation is someone elseâ€™s problem – When you drive off the lot in a new car you just bought, it takes a huge dive in value. If you sell, youâ€™ll never get that value back. With a lease, you donâ€™t have to worry about the loss of value due to regular wear and tear.
- Get a new car more frequently – If you really want a new car every two or three years, a lease makes that easy. Instead of owning a car that depreciates and selling it a few years after buying, a lease makes it easy to trade in for something fresh.
- Maintenance may be included – Because the leasing company technically owns the car, they may cover all or some of the carâ€™s maintenance.
When it comes to your finances, a lease is best for someone who would get a new car every two or three years anyway. If that is a big priority for you and your money, leasing is the way to go.
Cons of Leasing a Vehicle
If leasing were so great, everyone would do it! As with many things, there are also some drawbacks. Here are some important considerations:
- You still have to pay interest – A car loan charges you an interest rate based on your credit and current market conditions. With a lease, you donâ€™t see an interest rate directly, but there is something else called a â€œmoney factor.â€ This is essentially the interest rate you pay over the period you lease the car.
- You donâ€™t own the car – At the end of a loan, you own a car. At the end of a lease, youâ€™ve spent a whole bunch of money and donâ€™t have anything to show for it other than the option to buy the car at a discount.
- Mileage and wear charges – When you own a car, you can drive it as much and as far as you want with no major repercussions. When your lease ends, you may have to pay for excess mileage or wear beyond what the lease allows.
In the long run, owning a car makes the most sense. If you were to buy a car and keep it for 10 years, on average, instead of leasing a new car over a 40-year period, you will have over a million in savings when you take into account interest and the growth if you were to save and invest that money instead of spending on a car.
A lease makes sense if you plan to get a new car every few of years anyway. If not, you have a million reasons to keep driving your old car for a decade or longer.
What Leasing Means for Car Insurance
Now you know the difference in what buying versus leasing does to your bank account, letâ€™s look at another important factor in your vehicle ownership cost: insurance. Does buying or leasing give you a better insurance deal? The answer might surprise you!
There is no difference!
While your leasing company may require certain insurance minimum while you have the car, there is no material rate difference between buying and leasing when it comes to your car insurance.
One place you can save on your car insurance is by bundling with your home. Check out SelectQuote for auto and home insurance rates from several top insurance companies with one quick and easy form. Car insurance quotes are easy at SelectQuote whether you own or lease your car.
Should You Lease Your Next Vehicle?
When it comes to your next car, your decision on whether to buy or lease comes down to your preferences.
If your primary concern is cost, buying is better than leasing in the long term. Ending your loan with a car you can sell, or even better keep and drive with no payment, is superior to giving the car back and paying fees. But if you plan to get a new car every few years, leasing will save you a few bucks.
Thankfully, your car insurance costs are the same either way.
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