What Does It Mean to Lease a Car? (Car Buying Tips)

I'm overdue in mentioning the aspects of leasing a car, so here it goes.

What is Leasing?
Many of my customers heard about leasing, but didn't understand what it was. This is how I explained it.

When you buy a car, you are purchasing the entire car. You make payments until the car is 100% yours. You gain equity in the car and may trade the equity for cash (by selling it).

When you lease a car, you are paying for the use or depreciation of the car. Here's what I mean. Suppose you lease a $30,000 car for 36-months. Even before you sign the paperwork, the dealership will tell you that the $30,000 car will be worth $20,000 in three years. When you lease, you would have to pay off the $10,000 depreciation and not the $30,000 price. At the end of the lease period, you usually will have the option to buy the car for $20,000 or you can enter into a lease agreement for another vehicle.

Leasing (Pros)

• you will have a lower car payment;
• you can drive more expensive models that normally would be out of your price range;
• your car is always under warranty (if the lease is under 3 years);
• you can drive the latest models and enjoy the latest car technology.

Leasing (Cons)

• you will not gain equity in the car;
• you must either return the car at the end of the leasing period, buy the car or lease another car;
• you get stuck into always having a car payment;
• you are restricted to mileage limits with stiff per-mile penalties for exceeding those limits. You probably wouldn't want to take your Disney vacation in your leased car if it involves a long trip;
• you will pay more in the long run than someone who buys the car.

Written by a former car salesman, college math instructor, health insurance analyst and the author of The Car Buying Bible. This 162-page car buying guide is full of great car buying tips and offers the best car loan calculator around.