Vehicle Leases Aren't for Everyone
A vehicle lease can offer a low monthly payment on a vehicle that may be several grades above what you might be able to afford if you applied for a car loan or paid cash. It can be a smart option for certain drivers, but leasing comes with conditions and risks to carefully consider before deciding if it’s right for you.
There are several well-known risks behind leasing a vehicle: the extra costs to pay if the vehicle is driven beyond the agreed upon mileage, if damage is done to the vehicle, or it’s turned in with beyond normal wear and tear. There are, however, other risks that potential lessees don’t know about:
- Leasing beyond the vehicle warranty: Most leases last two or three years, with a few exceptions that are available for four or more years. With a standard vehicle warranty of three years or 36,000 miles (whichever comes first), an extended lease could pose a big—and expensive—problem: If you’re leasing the vehicle past the warranty, you’ll likely be on the hook for any major maintenance or mechanical repairs.
To avoid having to pay both the monthly lease rate and major repair costs, make sure you understand your warranty and its limits.
- Putting too much down: Many advertised lease specials show great low rates, but with a sizeable required down payment. Putting money down allows for a lower monthly payment, but it can also leave you exposed. In the unfortunate event that the vehicle is stolen or totaled during the first few months, the insurance company will reimburse the leasing company for the value of the vehicle, but it is unlikely that they will reimburse the money you’ve already paid.
Because of this, it might make sense to make a minimal down payment or avoid making one at all. Instead consider putting that money into an interest-generating account and parsing it out on top of your minimum monthly payments.
- Not having gap coverage: Gap coverage might make sense with a lease. The value of a new car drops by an average of 10% the moment you drive it off the lot. Again, in the unfortunate event the vehicle is stolen or totaled early on in the lease, the insurance company will reimburse the leasing company for the vehicle’s current value. That amount might not cover your total obligation laid out in the terms of your lease, meaning you’d still be on the hook to pay the difference between the value of the car when you signed the lease and the amount the insurance company paid.
Gap coverage will prevent you from having to pay out of pocket for this difference.
In the end, leasing may be a perfectly suitable option for many drivers. It provides a low monthly payment and the option to upgrade and drive a new vehicle every few years. It is important, however, to understand the individual risks that come with each decision.