Leasing a car can seem like a great idea at first, thanks to the low, low monthly payments offered. Some brand new cars can be leased for as little as $200 a month, making it seem like a steal. But before you go sign on the dotted line for a brand new leased ride, there are a few things you should know about the pitfalls of leasing vs. buying a car.
- You pay the most during the time the car is depreciating the most
Car dealers love leasing new cars because cars depreciate the most in the first three years – which is a standard lease period. When you buy a new car, it depreciates significantly in the first three years, but then levels out. Every year that you keep a car past when it is paid off, it is gaining back the equity that you put into it, which doesn’t happen when you lease.
Most leases do come with a purchase option if you change your mind and decide you want to buy. The problem is, the purchase price is set at the beginning of the lease and what you spent on the lease doesn’t apply to the purchase price. So, even if you decide to buy, you will still end up way overpaying for it.
- Insurance is often significantly higher on leased cars
Many people are shocked to find out how high their insurance rates jump when they try and lease a car. This is because insurance companies generally require you to have much higher liability limits – as much as $300,000. When you buy a car, you are part owner with the bank, which means you have more control over how much insurance you want to have. When you lease, the dealer gets to decide how much insurance they want you to carry and you have to pay for it.
- Mileage Penalties
One thing that many people are unaware of is that lease contracts only cover the first 12,000 to 15,000 miles of driving per year. Any mileage beyond that incurs a mileage penalty of anywhere from 10 cent to 25 cents per mile. This is bad news for men, but not so bad for women. According to the US Department of Transportation Federal Highway Administration, the average male between the ages of 20-34 drives 17,976 miles per year while the average male between the ages of 35-54 drives 18,858 miles per year. Women in both age groups, on the other hand, come in at just around 12,000 miles or less. This means on average, men could have as much as $1,700 per year in mileage penalties tacked onto their payments, and that’s just if they are average drivers.
- You still have to pay for normal wear and tear repairs
If you have a 3 year lease, you still have to pay for oil changes, brake pad and possibly even rotor replacement, tire rotations and possibly even new tires. That can still potentially add up to thousands of dollars on a car that won’t even be yours several years down the road.
- Hidden fees
While the low down payment and low monthly payments may seem attractive at first, what you are not seeing is all the fees associated with leasing. Two of the primary fees you will most likely have to pay are an acquisition fee of at least $400 at the beginning of the lease and then at the end of the lease, a disposition fee of at least $200. Leasing companies are also notorious for charging a wide variety of “wear and tear” fees that dock you royally for any small dings, scratches or small window chips that happen as a normal part of driving a vehicle.
- No equity, nothing to sell and you can’t just walk away
When you are buying a car, if there comes a point in time when you can no longer make payments on it, you can sell it and at least get back some of the money you put into it. Depending on how long you have had it and how much equity you have in it, you can potentially get enough back to pay off the loan and maybe even buy a less expensive car. Even in the less-than-best case scenario, unless you are seriously upside down, you can at least sell it for relatively close to what you still owe on it, so you may only owe a few hundred dollars.
When you do pay off a car, you own it free and clear, which means you can sell it and keep the proceeds or – in a pinch – even take out a car title loan. When you lease a car, you don’t own it and never will. If you can’t make payments on it, you can return it, but then you will be charged a huge number of penalties and fees – and then you still don’t have a car. On average, for every 5 years that you drive a car after it is paid off, you essentially save the cost of an entire new car. That fact alone should give most people pause before running off to lease a new car.