When does it make sense to lease a car? There are plenty of sources telling you what a bad deal it is. In many cases, perhaps most, that advice is right on the money. But there are a few situations when you should lease a car, or at least give it serious consideration.
This isn’t to say that leasing is the better strategy in each situation below. It’s more to say that leasing should be considered as an option, if the terms are right. Here are five reasons to lease a car:
1. When you need a vehicle for your business
From an accounting standpoint, leasing often works better than purchasing a car. As an expense, it matches up perfectly. That’s because you can generally deduct the actual amount of the lease payment (as long as you use actual expenses and not the standard mileage rate).
By contrast, if your business owns the vehicle, you will have to break out the amount of the monthly payment between the actual interest paid, and the depreciation allowance. Since depreciation on a vehicle is written off over several years, there may be a larger tax deduction as a result of a lease arrangement.
Still another issue with the business use of a car is the fact that automobiles are depreciating assets. That means they steadily decline in value from the moment they’re purchased. Since a lease is a “pay as you go” arrangement, it does not have to be sold at the end of the term, and there is no “depreciation recapture” (selling a vehicle for more than its depreciated value), which could create a tax liability.
Also, since leased vehicles can often be acquired with no down payment, there is no upfront capital investment. That could free up badly needed capital for other purposes.
2. When dealers roll out leasing give-away deals
Car dealers sometimes offer car leases at incredibly low rates on certain cars. This is most common on higher-end vehicles. For example, it’s not uncommon to see makes such as BMW and Lexus offering better deals on leases than what you can get on a purchase of the same vehicles.
This may be evidenced by the absence of a capital cost reduction requirement (see below), and a low monthly payment.
Luxury cars can offer low-price lease arrangements because the cars have a higher residual value. That means that the cars are worth more by the end of the lease term than what non-luxury models will be after the same period of time. (They can then be sold as certified pre-owned vehicles.) And since you will only have use of the car for a few years, dealers can often make them available with very attractive terms.
3. When lease payments are lower than the loan payment on a purchase
Even apart from luxury vehicles, there may be certain situations in which the monthly payment on a lease will be lower than what it will be for a purchase. In this situation, leasing can make more sense. Exactly how much sense it will make, however, will depend upon the amount of cash required up front.
Vehicle purchases typically require a down payment upfront. But while leases don’t involve down payments, they sometimes require capital cost reductions. Though it can look and feel just like a down payment, it actually serves an entirely different function. While a down payment represents part of the purchase price, a capital cost reduction is used to lower the monthly payments on the lease.
You can and should think of a capital cost reduction as a prepayment of monthly lease payments. If you have to pay this fee upfront, it could reduce the benefit of the lower monthly payments on the lease.
But if the lease does not require a capital cost reduction, and the monthly payment is still lower than what it would be for the purchase of the same car, then the lease might make sense.
4. When the need for a car is only temporary
It can be hard to imagine the need for a car ever being temporary. An example might include if you are going to take a job in a remote location and only needed a car for one or two years. It may be more cost-effective—and less hassle—to simply lease a vehicle for only as long as you need it. After that, you can let the lease expire and get on with your life.
5. You turn your cars over quickly
Whether or not it makes sense do so, some people like purchasing a new car every three to five years. It may be that you’ve resigned yourself to always having a monthly car payment, or that you prefer driving a late model car to avoid large repair expenses.
That can be an expensive consumption pattern if you do this with serial purchases. Each car that you buy will require a down payment, and experience rapid depreciation within the first five years. Leasing could be a better alternative.
If you can lease your vehicles, you can simply turn your car in the end of the lease term, and exchange it for a new one. There’s no hassle with selling or turning in your old vehicle or worrying about the depreciation on it.
Leasing is made to order for this situation. Naturally, it works better if the leases don’t require capital cost reductions. You also have to be careful of mileage. Leases almost always come with a provision that limits the number of miles you can drive the vehicle. It’s typically 12,000 to 15,000 miles, but it can be less. Make sure that you will have little trouble staying within these limits. The cost of exceeding them can more than cancel out any savings on the monthly payment.
So when does it make sense to lease a car?
Leasing is often a bad deal. But there are certain situations—when you need a car for only a short while, or for your business, or if you just like driving new cars—where leasing may make more sense than buying. Do your research and decide what’s right for you.
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