If shelling out $400 or more per month for the next five years on a new car sounds too steep to you, there's another option: leasing. Essentially a long-term rental with a purchase option at the end, leasing can save you a great deal in monthly payments versus buying a new car outright. The downside? Unless you buy it (and that will cost you more money), you have to return it when the term is up.
Related: More #FirstTimeBuyers Advice
Still, it's a deal many consumers are willing to take. Leasing accounted for 21.7 percent of new-car purchases in 2014, according IHS Automotive. If you're new to car shopping, leasing can seem intimidating. Don't worry; we've listed some of the advantages and disadvantages below.
Advantages of Leasing
- The payments are typically lower. The going rate on a 36-month lease for several leading midsize family sedans is around $200 per month (plus applicable sales tax) for a modest trim level. Cash due at signing ranges from around $1,400 to $2,600 plus tax, depending on the car and region, and that generally includes your first month's payment. By contrast, if you purchased one of those cars (let's say you negotiated $23,500 out-the-door) with 10 percent down and the remainder financed for five years at 3 percent interest, your monthly payment would be $380.
- You could own a nicer car than what you'd otherwise afford. For a payment similar to the $380 to buy that family sedan, you could lease an entry-level BMW, Lexus or Mercedes. A lot of people do just that: Leasing accounts for nearly half of all luxury-brand sales, according to J.D. Power and Associates.
- You get the latest and greatest. This isn't superficial: Besides that new-car smell, new cars tend to have better gas mileage and more up-to-date safety and multimedia systems.
- If you like the car, you can usually opt to keep it. After 36 months, Honda says you can buy the Accord LX sedan you've leased for around $13,761 plus tax. Nissan says you can have your off-lease Altima 2.5 S for $13,269, while Hyundai says that off-lease Sonata SE can be yours for just $12,965. These offers are in the neighborhood of what you'd owe if you took the original price of the car and subtracted all your lease payments, the cash you paid up front and any listed factory rebates applied to the lease. "You're simply paying for the part of the car's original price that you haven't already paid," LeaseGuide.com advises. "It's a fair price in this respect. Nobody gets cheated." That purchase price is sometimes negotiable, the website adds, and it typically absolves you of the fees that are imposed when you go past your allowed mileage.
- If you lease within your means, you could come out ahead. Take advantage of a lease special on a car that you could have financed, and it could work to your favor. In the midsize-sedan scenario, financing the car would cost you a little more than $25,000 including interest and taxes over five years, according to Bankrate.com. But if you leased the car at $220 a month for three years including tax, paid $2,000 up front and took a two-year, 2 percent loan to buy it off-lease for $14,000 out-the-door, you'd pay a little over $24,000 including interest and fees. In both cases, you'd fully own the car after five years. But the second path saves you around $1,000.
- In many cases you're out of a car at the end of your lease. Coming out ahead by leasing requires diligently saving during those lease payments so you can afford the car (or a short loan on it) at the end of the term. But if you simply spent your monthly car-payment budget on a lease instead of a loan, your lease will leave you handing the keys back to the dealer with nothing to show for it.
- Leasing begets more leasing. Without the accrued savings to buy your lease, the end of a contract will often leave you with ... another lease. That puts you on the leasing treadmill, making payments forever on cars you'll never fully own.
- The credit requirements may be higher. Lessees generally put less money down, so financiers are exposed to more risk if you default on your payments, explains LeaseGuide.com. That's why lease specials may require higher credit scores than those required to get low-APR financing. "You still have to have the credit," AutoPacific analyst David Sullivan explained. If "you can't get a Nissan Versa because you have poor credit, you're not going to walk in and [lease a BMW] 3 Series."
- Negotiating lease terms can be trickier. But it's not impossible. Make sure you understand the terms (capitalized costs, acquisition fees, money factors and more) and you can negotiate how much you owe up front and, in some cases, your monthly lease payment. Check out Cars.com's Lease Calculator to see what your payment should be.
- You have to watch your mileage. Often, the advertised low rates come with mileage limits of 12,000 miles or less per year. If you have a long commute or take a lot of road trips, you could easily pass that limit. Lenders often charge from 15 to 25 cents per mile above the limit, which is a fee you'll have to pay at the end of the lease.
In the market for a “cheap” car? Find cars priced at $6,000 or less near you.