Don’t you just get a rush of excitement from being able to get a new car? You’re all set to decide which to get, but you need to get the money situation figured out first. The dealership will provide you a few options to choose from, one of which is a car lease.
Leasing may offer a few short-term benefits, but in the long run, it’s not a good option. In a nutshell, it’s like renting a car for a long time. You may benefit more from other available options.
As you read through this article, consider all the facts before deciding if leasing would be best for you.
What is Leasing?
A car lease is an agreement between you and a car dealership or owner (AKA the “lessor”). It will have the following details listed in the paperwork:
- The duration of time which you may use the car — often, this is between 2 and 4 years
- The value of the vehicle at the time of signing, and its estimated value upon return
- Wear and tear details; this includes what the lessor defines as “excessive wear and tear,” along with any associated fees
- The number of miles allowed
- What happens if you miss a payment?
- The monthly payment, a calculation based on the difference between the car’s estimated value before and after the lease, divided by the lease’s duration
- For example, a 2021 Honda Civic Type-R starts at around $38,000 MSRP. If the lessor says it’ll be worth $22,000 at the end of a 4-year lease, your monthly payments will be around $333.
When you sign a car lease, expect to make a payment up front, and then drive off within the guidelines of the lease for the agreed length of time.
Just make sure you follow those guidelines, because if you don’t, it can lead to some serious, expensive consequences, which we’ll cover next.
General Leasing Requirements
The key difference between a car lease and a car loan is what you’re borrowing. A lease lets you borrow the car, while a loan means you have borrowed money to buy and own the car. For this reason, your credit will matter much more when shopping for a car lease.
It’s generally accepted that having a credit score of roughly 660 is likely high enough to get a car loan. People with lower credit scores can also get car loans, but they will pay a much higher annual percentage rate (APR).
The same cannot usually be said for car leases. Experian reports the people who leased cars in 2020 had an average credit score of 729. Those with lesser credit were often asked to find a creditworthy co-signer. However, if your credit isn’t around 700, you shouldn’t even consider a car lease. Leasing will lead to a high APR and higher monthly payments; it can also have long-term effects on your financial status.
Whatever lease you sign will limit you in terms of how many miles you can travel in the car. Exceeding those limits will result in extra fees upon return.
Regardless of whether you lease or buy, you’ll need to have insurance ready. Most leases require full coverage for the length of the lease. If your coverage doesn’t also cover the full replacement value of the vehicle, in the event of a total-loss crash, you may have to add this coverage. Should you be in an accident and total the car, this extra coverage will cover the value to replace it. Financially, leasing has more upfront costs than other car-acquisition options.
What Positives are There to Leasing a Car?
From a financial standpoint, there are not many people who benefit from leasing a car. However, there are a few small positives to leasing, which are listed below.
- You get to show off in a nice car: A high-end car comes with a high price tag that not many can afford. A lease is a nice option for looking stylish in a fresh new vehicle. Plus, you can switch to a new one after the current lease, ends if you want.
- Tax benefits to delivery drivers: Even though the car isn’t yours, you can use it for business purposes. For example, the miles and gas you put on the car for uses like making DoorDash deliveries can be written off as a business expense.
- Lower monthly payments: You can expect to pay less per month for a car lease than you would for a car loan.
Beyond these, there aren’t many other positives to leasing. If anything, you are likely to come across negatives. Unless your credit score is good, a car lease is a complete liability.
Things to Consider Before Leasing
Before thinking about a car lease, look into these key factors.
- Look at your credit scores — all of them. When checking your credit, you’ll get scores from TransUnion, Equifax, and Experian. Inspect all of them to make sure everything is accurate. Any one of these scores, if low enough, can affect your chances of getting a lease. If you might need a co-signer, it’s not worth getting a lease.
- Consider how often you’ll use the car. If you think you’d drive the car for more miles than allotted, try to get more miles included in the lease, or try limiting your driving.
- Are you comfortable with the fact that you’ll have to return the vehicle at the end of the lease, even if you get attached to it?
- No matter what, do your research. Look into the car’s brand, its warranty, the lessor, reviews from other customers, even do a test drive to make sure it’s the right car for you.
Options Better Than Leasing
One option that works better than leasing is financing, that is, arranging a loan directly from the dealer or automaker.
Another option is to take a loan from your bank or other financial institution. If you go this route, you don’t have to have a car selected before applying for the loan.
With either option, be sure to stay current with your payments; otherwise, you risk the car being repossessed. This would also have a major impact on your credit.
Consider looking into a used car, too. Since you’ll have to put down a deposit on a lease regardless, you might as well put that money toward the purchase of a used car. Of course, be sure to test any vehicle before you drive away in it, no matter which option you choose.
Your Next Steps
With this information, we hope you’ll look into options other than a car lease. Leases are rarely the best choice, unless your credit is great and you have the money to put toward a lease.
Finally, all the information you’ll need to know about any lease or purchase will be in its paperwork, so read it carefully.