When it comes to obtaining a new vehicle, there are two major routes a buyer can take. Either you can buy the car—with or without a loan—or you can lease it. While lessees don’t build equity, leasing is a good option for those who want to drive new cars at a lower price.
So, what does it mean to lease a car? Unlike a loan, a lease enables you to pay for the car’s depreciation, rather than the cost of the car itself. Because of this, monthly loan payments are typically more expensive than lease payments. Lessees do not take any ownership of the car; when the lease period is over, you either return the car to the dealership or you purchase it. Leasing a vehicle is often a good option for those who keep their cars relatively clean and do not need to put much mileage on their vehicles, but leasing long-term is typically a more expensive option that buying.
There are several buzzwords that may be useful to know when considering leasing a vehicle.
- Capitalized Cost: the price of the vehicle
- Capital Cost Reduction: another term for down payment
- Residual Value: the projected value of the vehicle at the end of the lease
Besides the different costs each month, leasing is almost identical to taking out a loan. Like a loan, a lease affects your credit score because it triggers a credit inquiry. Additionally, you still pay finance charges in addition to the principal portions of your payment. In fact, finance charges associated with leases are often higher because of the lower monthly payments. Leases are often accompanied by higher insurance costs as well, which is why many lessees purchase “gap insurance,” in addition to their regular car insurance.
Overall, key differences between a leased and bought vehicle include:
- Leases, unlike loans, can be negotiated.
- The risk of depreciation is shifted to the manufacturer.
- Lessees pay for repairs on the vehicle.
- Early termination charges make returning a leased vehicle inconvenient.
- The number of miles that can be driven on a leased vehicle is limited to 12,000 to 15,000.
A lease is a contract, so ending it is not as simple as returning the vehicle to the dealership. Because it is equivalent to defaulting on a loan, ending the lease early will have negative effects on your credit, and you will still owe money. If you are unable to continue your lease, you may consider subletting the vehicle through Swapalease or LeaseTrader.
Leasing is a great option for drivers who only need a midterm vehicle or who enjoy driving nicer, newer cars. However, leasing is not the best option for someone looking for the cheapest way to purchase vehicle. This is because despite low monthly rates, leasing is typically the most expensive long-term solution. If you are a frequent driver or simply want to claim ownership over your vehicle, buying a vehicle may be the best option for you.