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Personal Finance Courses: Vehicle Acquisition

Introduction to Vehicle Acquisition Preparing to Buy a Vehicle Leasing a Vehicle Building Your Vehicle Budget Choosing a Vehicle Insurance and Maintenance for Your Vehicle Summary of Vehicle Acquisition
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Leasing a Vehicle

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Leasing a Vehicle

To buy or to lease? Auto leasing has grown greatly in popularity as an alternative to owning. Leasing isn’t just a matter of plopping down some rent every month in return for the use of a nice car. You also have responsibilities.

How it works

Leasing means paying for the use of a vehicle over a specific period of time. When you sign a lease, you agree to make regular monthly payments on it, maintain it, pay taxes on it (including sales tax), pay license fees, and buy insurance for it. As part of the lease, you agree to keep the vehicle for a certain number of months (the maximum is usually 48 months) and then turn it in at lease end. With many leases, you have the option of buying the vehicle at the lease’s end.

When your lease ends, you must turn the vehicle back in to the leasing company with no more than expected wear and tear, and within the mileage limit specified in the contract. If you go over this limit, you must pay a fee. If there is damage, you must pay for that.

A word about insurance

Although you are leasing rather than buying, you still must maintain auto insurance on your car. The coverage may be more or less than you would normally buy. The price varies by company, but a typical contract might require $100,000 of liability coverage per person and $300,000 per occurrence and $50,000 for property damage, and both comprehensive insurance and collision insurance. As with any form of insurance, it pays to shop around before you buy and to look into all available discounts that insurance companies offer.

To help you decide whether to buy or lease, let’s look at the major pros and cons.

The advantages

  • The convenience of turning in the car at lease’s end rather than having to sell it or trade it in.
  • You can usually pay less with leasing, though this depends on several factors. Generally, you pay for the portion of the vehicle that you will actually use in time.
  • There is usually little or no down payment required.
  • The sales taxes you pay on your monthly payments are tax deductible in most states.
  • Sales taxes are spread out, since they are levied on the monthly payments.
  • You can negotiate the value of the car.
  • Most leases come with gap insurance included. Gap insurance pays off the difference between what you owe on the lease and what the car is worth in the event that it is totaled.

The disadvantages

Before you sign on the dotted line, consider these disadvantages:

  • You might be required to pay more for insurance on the vehicle than you would pay on a car you bought.
  • If you are a perpetual leaser, you will be stuck with car payments that never end.
  • You will be penalized if you exceed the yearly mileage limit. This limit is usually 10,000–15,000 miles and varies according to company.
  • If you buy the car when the lease ends, you’ll pay more than if you had bought the car outright.
  • Breaking a lease early results in a big termination fee.
  • You will most likely have no equity in the vehicle.
  • If there is damage or excessive wear and tear, you will have to pay to have those repaired.

Should you lease?

So is leasing a good idea for you? Consider the following things as well:

Want to customize? Since the vehicle does not belong to you, you can’t make any changes to it. That means no repainting or customizing.

How do you treat your cars? If you are tough on your cars or irresponsible, you will have to pay for any damages and any wear and tear that is deemed excessive.

Are you financially stable? Your financial situation should be stable if you want to lease, because you will be committed to your auto. Ending your lease early will cost you extra, and you may also have to pay all the remaining payments.

How much do you drive? Estimate how much you drive in a year. Is it more than the amount specified in a lease, meaning between 10,000 and 15,000 miles? If it is, you’ll have to pay fees for the excess mileage when the lease ends.

How is your credit? You need a very good credit rating in order to lease. If your credit is poor, you may pay a higher lease rate (which is factored into your monthly payments).