August 14, 2008

Is leasing a car ever a good idea?

I've said before that I don't think leasing a car is a smart move. Trent over at The Simple Dollar recently examined the question of buying a new car, leasing or buying used. Trent raised the unique situation where someone might 'need' a new car for their job, he said:

"...if you use your car to drive around clients, for example, you’ll have some extra value from having a shiny new car. If you’re in that position, your decision is probably pretty easy. There’s added value for you to constantly have a newer car, so buying a car on a lease is likely the most effective way to go."
I still think that more often than not a lease is going to be the worse financial choice. However when you are in the situation where you do need a new car for your job then a lease might at least be worth a second look. Usually this would mean someone who is in sales.

First of all if you're a salesman then your company may give you a leased car as a company benefit. If theres no other options available then this is a no-brainer. You're getting a car for free and the company is maintaining the lease and making the payments. However some employers may give you the choice between a cash payment to purchase your own car and a leased vehicle. In this situation I'd compare buying a new car and taking the leased vehicle.

If you are a salesperson and looking at a lease that you finance yourself then I'd pay special attention to the mileage restrictions on lease terms. Usually leases have pretty strict limits on mileage over the term of the lease and also have high fees per mile if you go over the mileage limit. Salespeople typically drive a lot so they would be likely to exceed a low mileage restriction and then end up owing extra money at lease closing if they aren't careful.

In any case I think you should compare the terms of a lease to the costs of purchasing a new car to evaluate the two options. To do so use a lease versus buy calculator. Make sure you get all the numbers beforehand and do the comparison in advance of going to a dealer to make a purchase. If you go to a dealer then you will be shown payment numbers for a lease and it may be very difficult to figure out how well exactly the lease compares to buying new.

Also don't fall for an advertisement that only cites a low lease monthly payment. The TV ad may say: "Just $199 a month for 36 months" and if you look at that and compare it to a $438 monthly payment for buying new then the lease may seem more attractive. But if you look at the lease terms closer you may see you have to pay $1295 down, a $500 security deposit and that the annual mileage limit is only 10,000 miles. Those details make a significant difference in the financial comparison and its hard to compare these without the aid of a calculator. You should really make sure you know all the fine print details of the lease terms up front. You can check the car manufacturers website to look for details on lease programs and incentive interest rates. Ford has a payment estimator that even lets you directly compare a lease versus buying new.

Its possible that a lease might workout as a potentially better option in the unique situation where you need a new car for work and can't make higher payments. But generally I believe that the lease is going to be the worst choice. In any case I'd recommend getting all the details of the lease terms and using a calculator to compare lease to buying.

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