Rising interest rates make leasing a car more and more attractive. Finally, leasing keeps your monthly payments down and you can afford a fancier ride. While leasing has some advantages, especially if you trade cars every few years, it’s also fraught with disadvantages. Here are five of them.
1. No Equity
Leasing means never having equity in the vehicle. You can never sell it for cash, and any money you put into it will only benefit the dealer. Financing a loan might not be fun, but if you’re just leasing because you think it’ll be less expensive, you need to check the numbers to be sure.
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Suppose you plan to lease a vehicle for three years. If you bought the vehicle, the payments would be $500 per month for 36 months, but since you are leasing, your payment is only $350 per month. You feel like you’ve scored a win.
However, when it comes time to return the vehicle, the car has a few scratches and you have to pay to have them fixed. You’ve also exceeded the mileage limit, which will cost you more. Just as importantly, you have no equity. You really only paid to use the car.
What if you opted to buy the car instead and extend the loan term to 60 months instead of 36 to keep your monthly payments down? Even though you have 24 more months of monthly payment, you end up with a free and clean car to own. If you’re ever in a financial bind, it’s a car that you can use as collateral or sell.
Even better, if you maintain the vehicle well, you can drive for years without paying a car.
2. Mileage Restrictions
Dealers typically limit mileage for leased cars to 12,000 to 15,000 per year. This is for two reasons. Not only will you be able to resell a low-mileage car for more after you return it, but your contract says you must pay for any mileage over the limit.
That means fewer long car journeys and you need to be extra careful about how many miles you have on the odometer.
If you want to lease a vehicle, read the contract carefully. It is possible that the dealer will include a clause that says you cannot move the leased vehicle to another state or country. For some, this clause is restrictive.
4. Difficult when your situation changes
Let’s say you’re sailing and life is going great. You’ve reached the end of your lease and it’s time to hand it in and find another vehicle on the property.
What happens if you get sick or lose your job? Will you have enough money in your emergency savings account to drive another car out of the parking lot, or will you be stuck with no transportation?
5. Additional Costs
Car leasing is no fun to read. If you read the contract closely enough, you might notice an upfront fee and an obligation to pay for repairs (even if the car isn’t yours). There are also high termination fees in the event of a premature termination of the tenancy.
Despite these disadvantages, leases are perfect for some. For example, if you have a high-profile job and want to project an image of accomplishment while driving, a leased vehicle may be the most cost-effective way to do so.
No matter what life situation you find yourself in, the smart move is always to read the fine print before making a final decision.
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