Auto Financing: The Pros and Cons of Leasing

Posted in Around the Web
October 5th, 2010 at 11:40 am by Ally

To lease or to buy – that is the question. Everybody seems to have an opinion on the best way to get into a new car. What are the guidelines that can help you decide what car loans, auto leasing and vehicle financing are right for you?Should you lease or buy your next car?

Proponents of buying will tell you that if you lease, you’ll have nothing to show for it when your lease is up. Leases and car loans are simply different methods of car financing. Each has its own benefits and drawbacks. But what about the costs associated with buying a car? The money you pay upfront could be invested in something, for example, that might give you a better return than your investment in a vehicle. We’ll examine the pros and cons of leasing so you can try to figure out which option is the best for you.

THE PROS

Low Down Payment (Capitalized Cost Reduction)
Capitalized cost reduction is basically your down payment, or however much you pay upfront when purchasing a car. The higher your initial payment, the lower your monthly payments will be. Those attractive advertised deals that you’ll see often require a high down payment. You can frequently lower this amount by simply negotiating with the dealer or trading your old vehicle in to satisfy the required cap cost.

Lower Monthly Payments
When you lease a vehicle, you only pay off the depreciation on the car and not its full value. For this reason, your monthly payments can be significantly less than if you decide to take an auto loan, or get traditional financing for the purchase of the car over the same time period.

Easy Turnover
When your lease is up, if your car is in good condition, you can simply hand it back and get into a new lease on a brand new vehicle. No need to go through the stressful process of selling your car or negotiating with a dealer about trade-in value.

Always Drive a New Car
One of the big advantages of leasing a car is that as long as you lease another vehicle when your lease is up, you never drive a car that is more than 2 to 4 years old. And that means low maintenance and the potential for a virtually trouble-free auto experience.

THE CONS

No Equity
The lease payments you make on your car do not give you ownership of the vehicle. Unlike with traditional car financing, when your lease is up and your payments stop, you do not own the car.

Extra Costs
Most lease agreements allow you to drive 12,000 to 15,000 miles per year. If you go over your allowed miles, you’ll have to pay an excess mileage charge between 12 cents to 15 cents per mile depending on your lease. It’s a good idea to check your records to see how many miles you average a year. In addition, you are responsible for damages to your vehicle beyond normal wear and tear and for other costs you agreed to when you leased the vehicle.

Early Termination Penalty
If you want to break your lease agreement before the end of its term, you stand to pay a big penalty. Depending on your leasing company, you could be required to pay a significant amount of money.

Insurance Shortfall
In the unfortunate event that your car is a total loss or stolen, your insurance company will only cover the market value of your car. This might not cover the amount you still owe on your lease. You can purchase gap insurance to protect yourself against this kind of situation. GAP Insurance is included in most lease agreements, but make sure to double check.

So…Lease or Buy?

There is no simple answer to whether it’s better to lease or buy a new or used vehicle. Each has its own benefits and drawbacks and everyone’s situation is different. The above information can empower and help you make a smart and educated decision.

Are you a leaser or a buyer? We’d love to hear your opinions.

Responses to this post (22 comments)

  1. 10/5/2010
    1:48 pm
    Andrew Madigan says:

    The terms on car loans and leases are rarely clear. It can be even more complicated to compare the interest on a loan to the interest on a lease. If you can get a direct comparison from the car dealer on a lease vs. loan payments, it’s worth looking at whether you could loan the car and just trade it in 3 years (like a lease). The problem is banks rarely tell you how much of the principle you’ll still owe on a loan in 3 years (assuming the loan is longer than that). In a lease you’re usually paying interest on the entire purchase price, but the depreciation is all you are paying the principle on, but it’s more complicated to compare the interest you are being charged.

    I’ve got a loan for now. For my next car I’m going to save and buy it in cash. I considered leasing but getting information on the costs is too complicated.

    • 10/11/2010
      10:27 am
      Ally says:

      Thanks for the feedback, Andrew!

  2. 1/25/2011
    12:17 pm
    Roger Benford says:

    I think my lease requires me to pay 25 cents per mile over the 15k/yr. I feel that is excessive.

    • 1/26/2011
      10:32 am
      Ally says:

      We hear you, Roger. Interested in hearing how that’s affected your driving habits, if you’d care to share. Either way, thanks for your comment.

  3. 2/16/2011
    11:10 pm
    BM says:

    CURIOUS TO KNOW WHAT EXACTLY THE AMOUNT OF PENALTY U PAY TURNING IN YOUR LEASE EARLY?

    • 2/17/2011
      10:39 am
      Ally says:

      We’re passing this off to our Auto folk now, BM, but you could also chat with one of our customer care reps. They’ll be able to explain things more clearly. Call 1-888-925-ALLY (2559). Thanks for the comment!

  4. 7/10/2011
    12:21 am
    CDS says:

    Is it true that active duty military may break the lease if they are relocated overseas? I want to purchase a new vehicle but will be up for new orders next August. Don’t know what the brass has in store for me.

  5. 10/13/2011
    5:38 pm
    Equinox says:

    I currently am leasing an equinox, is it possible to negotiate for a lower monthly payment due to hardship?

    • 10/13/2011
      5:43 pm
      Ally says:

      We just handle the banking side over here, but if you want to give our Auto partners a call at 1-888-925-2559 they’d be happy to talk through your question in greater detail. Thanks!

  6. 8/2/2012
    11:49 pm
    Larry Ranka says:

    Does Ally Financial charge an acquisition fee on Jeep leases and if so how much?

  7. 8/9/2012
    9:45 pm
    r welch says:

    I had a BK chap 13 dismissed in 2008
    620 score why can’t I get financed?
    only bill is 500 car loan with income over 100k

  8. 8/25/2012
    4:59 pm
    jo says:

    If I have lease with Ally and the car is totalled is there Gap insurance built into the contract so that it covers the difference between retail and the residual? in other words whatever amount you and my insurance company paid it would fully cover me so that i am not responsible for any excess?

    • 8/25/2012
      5:01 pm
      Ally says:

      Jo, we spoke with our Auto Partners and found out that if you have a Smartlease account, Gap insurance is included and standard. Please keep in mind, Gap insurance protection applies only if an insurance settlement is received, with the exception of accounts in the state of New York. If you have any further questions regarding this, please contact our Auto Partners at 1-888-925-2559.

  9. 11/28/2012
    11:34 am
    Gary says:

    I have 2 years remaining on my lease,I have relocated so my mileage needs are much less than the 15K I currently have.My question is can I convert into a new lease on the same or new vehicle for a 10k annual mileage,saving me money on the monthly lease

  10. 2/4/2013
    1:29 am
    Ruler65 says:

    I am 17 months into a 39 month lease with 15k miles per year. My job is no longer in my home, but instead it is an outside sales job and I am averaging at least 60 miles per day. Obviously I will go over the mileage so what would be the best option knowing that I am going to owe an enormous amount at the end of my lease. Could I turn it in early and lease a different car without paying the remaining 22 payments? The quote is within $500 of my balance

    Would love to know what my options are?

    • 2/5/2013
      6:04 pm
      Ally says:

      We handle the banking side of things but our auto partners would be glad to help you out, give them a call at 1-888-925-ALLY (9225).

  11. 6/25/2013
    2:34 pm
    Kevin says:

    I have a 24-mth Smart Lease with 8 months left on the lease, if I traded in my vehicle at a dealership for a new vehicle, are there any early termination fees charged on top of my (residual + remaining payments)?

    • 6/26/2013
      5:07 pm
      Ally says:

      We handle Ally Bank deposits over here, Kevin. But you can reach our Ally Auto team at 1-888-925-ALLY (2559) and someone can further assist.

  12. 7/12/2013
    2:53 pm
    GH says:

    Leased new Acadia (2 -3 months) ago but wife is affraid to drive it because it has proven to be a little bigger than she is comfortable (it’s wider and roads here are narrower). Can lease be terminated and if so what are penalities? I am a loyal GM buyer and bought with employee discount – I’d get another GM but I don’t think they make a 7 seater any smaller.

    • 7/15/2013
      6:02 pm
      Ally says:

      Thanks for the question. Our Ally Auto team would be happy to answer any questions specific to your lease agreement. They can be reached at 1-888-925-ALLY (2559). For more information about Ally Auto, you can check us out here, http://www.ally.com/auto/.

  13. 11/27/2013
    12:34 pm
    MM says:

    Is the residual buyout value at the end of the lease negotiable? My Jeep lease includes a lump sum payment to Ally Financial at the end of the lease, what (if any) are my options with this amount.

    • 12/2/2013
      12:38 pm
      Ally says:

      Thanks for reaching out. We only handle Ally Bank deposits, but you can reach out to our Ally Auto partners by calling 1-888-925-ALLY(2559).

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