What You Need to Know About Leasing a Car

Many of us – especially young people – have been in this situation before: you need a vehicle but can’t afford the down payment on a new car. On top of that, you don’t know any trusted mechanics to help make sure you don’t end up with a lemon of a used car.

We all know the cheapest way to buy a car is to pay for it up front in cash, but that just isn’t an option for most young people. The choice then comes down to financing or leasing a car.

Upgrade your vehicle by leasing a car

When my wife and I had our first child, we knew we wanted to upgrade our vehicle and get something newer and more reliable than my ’98 Elantra. But with my wife on maternity leave we weren’t sure we could handle the higher monthly payments that came with financing over 4-5 years. So we ended up leasing a 2007 Tucson for $350 per month over five years.

Let me start off by saying that you shouldn’t be fooled by lower lease payments. There are, however, some advantages to leasing a car.

Advantages of leasing a car

For one, the monthly payments are considerably lower than what you would pay if you financed the same vehicle. The difference between leasing and financing a new Honda Accord is $125 per month.

Another advantage is that taxes are only applied to the monthly payment rather than up front on the entire price of the car. You’ll get warranty coverage throughout the duration of your lease, plus the option to return the car to the dealer or buy the car at the end of the lease. And when it comes to getting car insurance, there’s absolutely no difference whether you lease or buy.

Finally, by leasing instead of buying you avoid the opportunity cost of tying up your money in a vehicle all at once.

Pitfalls of leasing a car

Of course, it’s also important to understand the downside to leasing a car. The longer your car is on lease, the more you’ll end up paying for it in the long run. You’re also restricted to a set amount of kilometres per year, and you might have less freedom when it comes to servicing your vehicle and making any modifications.

For the most part, leasing a car is only a smart move when you can write off the payments as a business expense. Leasing a car for personal use will typically cost you more money than financing a car in the long run.

Bottom line

However, like renting a house for a few years, leasing a car can be a wise short-term strategy for young people who can’t afford to buy today. You might want to defer ownership if your financial picture will be different in a few years.

That’s the approach we took with our leased vehicle. The low payments helped us out for a few years while we adjusted our budget to start a family. When the lease came due we decided to buy it out; in fact, we still own this car and plan on driving it for at least another five years.

Leasing a car is certainly a reasonable strategy when you’re young and building up your savings. Just remember not to use the lower payments as an excuse to get more car than you can really afford.

For young families looking for a safe new vehicle to get around in, leasing can help in the first few years while you get a handle on your finances. Make sure you have an exit strategy though – you don’t want to get trapped in a continuous cycle of financing or leasing a car.