Is Leasing a Car a Good Idea?

How Does Leasing a Car Work?

The question of whether to lease or buy a car is somewhat similar to renting vs. buying a home. Renting or leasing might be easier to swing financially on a monthly basis, but will require some concessions you wouldn't make otherwise.

If you buy a car, you're free to use it as you please. You'll also be on the hook to pay for any servicing or repairs that aren't under warranty. If a car is financed, you'll own it outright once your loan is paid off. When you no longer want it, it's yours to sell or trade in.

When you lease a car, you don't own it—you pay a fee to drive it for a set term, typically two to four years. You sign a lease agreement with the lessor, typically through a car dealership, and you may have to pay an upfront fee. However, this fee is typically much less than the down payment you'd pay to finance a car or what it would cost to buy a car outright.

During your lease, you'll make monthly payments for a set period of time and must adhere to certain rules included in your lease agreement. You might, for example, be limited in the number of miles you can drive the car annually, and face a fee if you go over that limit. The lease agreement will also specify what's under warranty and who is in charge of maintenance and servicing for expenses not covered by the warranty. In some leases, the lessee is responsible for these expenses, while in others, the lessor pays for them. You should always make sure you know what you are and aren't responsible for financially.

When your lease ends, you'll return the car and may have to pay additional fees to the dealership or lessor. You may be given the option to purchase your lease or lease another vehicle. If you return the car with damage beyond what's considered routine wear and tear, according to the Federal Trade Commission, you are financially responsible for these repairs.

What Are the Benefits of Leasing a Car?

Leasing a car has potential benefits that may appeal to some drivers:

• Lower monthly payments: Monthly payments for a car lease are usually lower than monthly car loan payments, so leasing could mean spending less money each month to drive the same car. Experian's State of the Automotive Finance Market report published in the second quarter (Q2) of 2020 found that, on average, monthly lease payments for the ten most-leased car models is $102 cheaper than loan payments (with some being as much as $150 to $200 cheaper).
• Smaller down payment: Car leases often require an upfront fee, but they're typically less than what you'd pay for a car loan down payment. If cash is tight for you, leasing could help you afford a car sooner.
• New-car experience: If it's important to you to drive newer cars, a lease can make this more affordable than buying. Since leases usually only last two to four years, you can constantly upgrade to new cars with the latest safety and technology features. You can try out different cars more frequently, and since the vehicles are newer and you only have them for a few years, they may be less prone to mechanical issues.
• Reduced hassle: If you own a car and no longer want or need it, you have to sell it or trade it in, which can be quite a pain. When you lease, upon the end date, you simply return the vehicle.
• Some covered costs: With newer leased cars, the warranty may cover any issues you run into. And in some leases, the lessor will pay for servicing or car problems not covered by the warranty. This isn't always the case, but if your lease covers these costs, you can avoid paying for car issues (though you'll likely have to pay for routine maintenance such as oil changes and new tires).

What Are the Drawbacks of Leasing a Car?

The above perks might have you revving your engine to sign a lease, but there are some major downsides to keep in mind. Tap the brakes and consider the following:

• Lack of ownership: Since you don't own the vehicle, you have no equity in it. This means unlike owning, you can't sell it and make some money back or take advantage of its trade-in value. Plus, when you finance a car, you'll eventually pay off the loan and rid yourself of a monthly car payment. With leasing, you'll be stuck with a monthly payment as long as you have the vehicle, even as it depreciates in value.
• Restriction of use: Leases often restrict the number of miles you can drive, typically a maximum 12,000 to 15,000 miles per year. While you may be able to negotiate higher mileage limits, these restrictions can be difficult or altogether disqualify those who have a longer commute. You may also not be able to take the car with you if you move to a different state or country.
• Additional costs to consider: Leasing a car comes with plenty of expenses, from the upfront fee to the monthly payment, and sometimes, additional fees when the lease ends. You're in charge of paying for gas, possibly some repairs and car insurance, which can cost more for leased cars. You also typically owe a sizable fee if you terminate the lease early.
• Constant car switching: While the ability to change cars frequently can be a benefit to some, for other drivers it could be seen as a major hassle to have to go through the process of switching cars every couple of years.

When Does It Make More Sense to Purchase a Car?

It's ultimately a personal decision whether to buy or lease a vehicle. If you strongly value driving a new or luxurious car and frequently upgrading to the latest vehicles, leasing could make sense for you. But if you're content to have one reliable car that you stick with for the long run, purchasing a car could make more sense.

It also makes more sense to purchase a car if you want to build equity in your vehicle and have it as an asset. Leasing can cost less in the short run, with a lower down payment and smaller monthly payment, but you don't get the benefits of ownership.

When you own your car, you can later sell it or trade it in to buy another car. If you play it right, you may make enough money selling a car that you don't have to finance the next one (or can at least reduce the size of a necessary loan). Leasing doesn't leave you with any equity in the car and can cost more money in the long run.

What Credit Score Do You Need to Lease a Car?

A FICO^® Score^☉ of 700 or above is typically required to lease a car, so if your credit isn't in great shape, you may find it hard to qualify for a car lease. According to Experian's State of the Automotive Finance Market report, the average credit score of those who lease a new car was 729 as of the second quarter of 2020. That's higher than the average credit score of 718 held by those who got new car loans the same quarter.

On the plus side, leasing a vehicle can help you build credit. Typically, lessors report your monthly payments to the credit bureaus like they would for an auto loan. This means if you're responsible with the lease, making your monthly payments on time every time, you can help improve your credit.

Improve Your Credit Before You Lease

If you're interested in leasing a car but unsure if your credit score is strong enough to help you qualify, it may be smart to spend a little time working to improve your credit first. This could mean lowering outstanding debts and credit card balances, paying off charge-offs and past-due accounts, and continuing to pay all of your bills on time. You can also use Experian Boost^®ø, a free tool that can add your cellphone, utility and video streaming bills to your credit report, potentially giving your credit score an easy, instant lift.