The pros and cons of leasing a car

2013 Ford Fusion iStockphoto

(MoneyWatch) I continue to get a lot of questions from readers about whether they should lease or buy a new car. Personally, I favor buying a "slightly used" car -- one that's about two years old -- with low mileage, good maintenance reviews and safety records. This typically results in the lowest cost of ownership and can save a lot of money over long periods of time. Of course buying a used car has disadvantages: You'll bear the risk of paying for significant maintenance and repairs in later years when the warranty expires and you'll have to wait for new technology, safety and efficiency enhancements that come with owning a new car every few years.

For people who are looking to always drive a new vehicle, and willing to live with the reality that they will always have a car payment because of this, then leasing can compare favorably.

But if you are going to lease a new vehicle, then just make sure you know that there are some downsides. Here a few of the most important things to keep in mind when you are considering leasing.

Leasing costs more over time: All thing being equal, for a given auto, the monthly payment for a two year lease is lower than a loan payment. This means that if are focusing just on the monthly payment, then the cash flow cost of lease payments is lower than buying. But when you compare the numbers, somewhere in the time between 24 and 36 months, leasing begins to cost the same as buying. Over a longer period of time, the total cost of leasing is almost always more than the cost of buying and driving the same vehicle.

The reason is that if you keep a car after paying off a loan and drive it for a few more years, the purchase cost is spread over a longer period of time. When you run the numbers, the cost of leasing a new car every two years -- which amounts to five two-year leases over a period of 10 years -- is more than the total cost of buying one car and driving it for 10 years.

Limits on mileage: Typically, lease contracts restrict the number of miles you can drive to between 12,000 and 15,000 miles per year. If you exceed this limit, you're charged excess mileage fees of 10 to 25 cents per mile over the limit at the end of the lease.

Excess wear and tear: Leasing companies require that you return their cars at the end of the lease with no more than "normal wear and tear". You'll pay extra to repair excess wear on tires, brakes, scratches and door dings at lease end.

No customizing: A leased car doesn't belong to you; it belongs to the leasing company. Therefore, if you make modifications like adding accessories, a sound system or custom painting, you'll likely be charged for the cost of repairs to undo them.

Termination penalty: Lease contracts are purposely written to discourage and even prevent early termination. To do so usually means you'll pay a termination penalty. The earlier you terminate a lease, the higher the penalty.

Finally, most dealers will offer lease financing through the manufacturers' "captive leasing company", which may or may not offer the most competitive deal. Check with your local bank, credit union or another independent leasing company for the best terms and deal for the car you are leasing.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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