There is no single rule when it comes to personal finances, including whether to rent a vehicle.
- Leasing a vehicle is a way to reduce monthly payments.
- Monthly payments incur no equity when you lease.
- Leasing also means living with the restrictions imposed by the dealer.
Rising interest rates make renting a car that much more tempting. After all, leasing keeps your monthly payments low and you can afford a fancier ride. Although leasing offers some advantages, especially if you trade in cars every two years, it also has many disadvantages. Here are five of them.
1. No equity
Leasing means never having any equity in the vehicle. You can never sell it for cash, and any money you invest in it only benefits the dealer. Financing a loan might not be fun, but if you’re renting just because you think it’ll be cheaper, you’ll need to check the numbers to be sure.
Let’s say you plan to lease a vehicle for three years. If you purchased the vehicle, the payments would be $500 per month for 36 months, but since you are leasing, your payment is only $350 per month. You feel like you’ve won a victory.
However, when it is time to return the vehicle, the car has some scratches and you have to pay to have them repaired. You have also exceeded the mileage limit, which will cost you more. Equally important, you have no equity. You really only paid for the use of the car.
Now, what if you decide to buy the car instead, and in order to keep your monthly payment low, you extend the term of the loan to 60 months instead of 36? Although you have a monthly payment for 24 more months, you will end up with a car that you own freely. If you’re ever in dire financial straits, this is a car you can use as collateral or sell.
Even better, if you maintain the vehicle well, you will be able to drive for years without car payment.
2. Mileage restrictions
Dealerships generally limit the mileage of leased cars to 12,000 to 15,000 per year. This is for two reasons. Not only will they be able to resell a low-mileage car for more after they return it, but your contract says you’ll have to pay for any mileage driven over the limit.
That means fewer long road trips and the need to pay close attention to how many miles you have on the odometer.
If you want to rent a vehicle, read the contract carefully. The dealership may include a clause stating that you cannot move to another state or country with the leased vehicle. For some, this clause is limiting.
4. Difficult if your situation changes
Let’s say you’re browsing and life is going well. You’re at the end of your lease, it’s time to hand it over and find another vehicle on the lot.
What happens if you get sick or lose your job? Will you have enough money in your emergency savings account drive another car out of the field or will you be stuck without transportation?
5. Additional costs
Automotive leases are not fun reading. If you read the contract closely enough, you might notice upfront costs and the responsibility to pay for repairs (even if the car isn’t yours). There will also be steep termination fees if you decide to end the lease early.
Despite these disadvantages, leases are perfect for some. For example, if you hold a high profile position and want to convey an image of achievement when driving, a rental vehicle may be the most cost-effective way to achieve this.
Whatever your situation in life, the smart move is always to read the fine print before making a final decision.
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