In what situation should you lease a car?
The argument of leasing vs buying is something that will never have a definitive answer and is a decision that should be made on a case by case basis. I want to walk through some common situations where leasing could be a right choice for someone. Let's dive into the situations.
What do you pay for in a lease?
A lot of people call leasing “renting a car” but that is not accurate at all. When you buy or finance a car, you are paying for the car’s value at the time of purchase. When you lease, you are financing the car's perceived depreciation. What this means is, you are paying for the value the car will lose during the time you have it. In some cases, this is very beneficial, especially for cars that are going to lose a lot of value. This way you are not stuck with a loan that you are underwater on.
Your #1 priority is monthly payment
If your concern is monthly payment, leasing is the way to go. Lease payments are always going to be lower than finance since you are borrowing a significantly smaller amount of money. In my experience, lease payments are usually 30-50% of what you would pay if you financed a car. Also, I have seen insurance payments on leases be lower as well since you are only insuring the value of the lease, not the full value of the car. The monthly payment calculation can be good for people who expect their income to continue to increase over time, thus making a car payment a smaller percentage.
You are someone that likes getting new vehicles
The great part about a lease is that typically it's only 3 years. That means at the end of your 3 year term, it's very easy to get a new car. You don't have to worry about selling your old one, being underwater on a loan, or negotiating trade in value. Most manufacturers also typically offer generous “returning lessee” incentives to get you into a new car. In many cases, you can exit your lease early, especially if the value of your car is above the “buy out” price. In my experience, I was able to trade in my car after only 1 year on a 3 year lease.
You want worry free ownership
One of the benefits of a lease is that during your period you have to perform almost no maintenance on the car, except for oil changes. Over 3 years, you are covered by your car’s bumper to bumper warranty, so any issues are covered. Changing brakes, tires, rotors, and some of the more expensive maintenance items usually do not kick in until later in the car's lifetime. If you lease a new car, there is very little you have to worry about.
If you use your car for business purposes
Many people lease because it makes it relatively easy to write the car of as a business expense. If you use your car for business purposes, you can write off the cost of your lease or a percentage of your lease against your business. This is typically easier than figuring out your car’s depreciation and then writing that off or using the standard mileage deduction if you owned a car. Everyone's situation is different so make sure to consult your tax advisor before writing off your car.
Is it hard to qualify for a lease?
Leases have traditionally been harder to qualify for than auto loans. Typically leasing only makes sense if you are “Tier A”, or have above a ~650 credit score. The car you are looking to lease will impact your income requirements. Generally you want to target your monthly lease payment to be around 1% of MSRP - so if you are buying a $50,000 car, expect to pay $500 a month. Generally leasing is a smarter choice for higher income individuals and it really should not be more than 15% of your monthly salary. Since you don't have an asset at the end of the lease, you do not want to be stretching making the payment. If you do get a good lease deal, you can have positive equity in the car when you return it (market value is above contract defined residual value).