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Does it ever make sense to lease a car?

Print Posted by Cheryl Costa August 16, 2008 07:59 AM

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When, if ever, does it make sense to lease a car? Is it a prudent or bad financial decision?

There is no doubt about it, leasing is a very popular option these days. When you lease a car, there is often a very low (or no) downpayment required, you pay less in sales tax, and your monthly payment is usually lower as well. Leasing generally allows you to drive a nicer car than you could otherwise afford and it costs you little in the way of out of pocket cash. Maintenance costs are also generally lower because most everything is covered by the new car warranty.

Everything sounds good so far, right? The only problem is that when you lease your cars, you always, always have a car payment. When you buy your cars, you have higher costs in the early years of ownership but after a while, the car payment (if you have one) drops off and you typically have 4 or more years of relatively low cost driving. Study after study has proven that it makes the most financial sense to buy your cars and keep them for 8 to 10 years. If you do this, your total costs are far and away lower than leasing several cars over the space of 8 to 10 years.

The problem is that some people can't (or don't want to) commit to keeping the same car for that amount of time. For personal reasons, it may be important to them to have a new car every 2 or 3 years. Also, some people who lease argue that the money they "save" each month by leasing can be invested in the stock market and then they aren't sinking as much money into a depreciating asset. (I don't know that too many people are making that argument these days, but it used to be a popular leasing "pro")

At the end of the day, buying your car and planning to own it for 8 to 10 years is the best financial option but not all decisions are financial. If you do decide to lease, be sure to read the fine print on your contract. It is fairly common for additional fees to be added at the end of the lease. If you exceed the permitted mileage allotment, expect to owe additional fees. Also, it is common to see fees added for excess wear and tear.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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About the contributors

Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.

Cheryl Costa is a principal at Forteris Wealth Management which is an independent, fee-only firm with offices in Framingham and Purchase, NY. She advises clients on investing, education funding, taxes and retirement planning. She has a BS from Worcester Polytechnic Institute and an MBA from Boston University and she is a Certified Financial Planner.

Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.