Q: A lot of my friends are leasing cars now, but I was always told that it's a bad idea. Is it ever smart to lease instead of buy?
A: Yes, but not usually. In most cases, leasing is a waste of money.
Car leasing fell in popularity after hitting a peak in the late 1990s, but has recently been on the upswing as interest rates rise and as car makers offer new promotions.
Although you may pay less per month with a lease and be able to drive a flashier car, most drivers will end up spending more money in the long run.
Let's say you want to drive a $40,000 car. If you lease it, you may pay only $30,000 over three years, but after those three years, you'll be giving up a car with several years of use left in it. And if you decide to buy the car in the end, you'll have paid more than $40,000.
It's math that most people understand, but the temptation of driving an expensive car can sometimes override logic.
"People are financing a lifestyle they can't afford — they could never end up with the cars if they chose to buy them," said Howard Dvorkin, founder of Consolidated Credit Counseling Services Inc. and author of "Credit Hell: How to Dig Out of Debt."
But there are a few situations where leasing is a better choice than buying.
The first: "If you are someone who needs — and the key word here is 'needs' — to have a nice-looking car to perform well at your job," said Peter Bielagus, author of "Getting Loaded," a personal finance guide for students and young professionals.
Many real estate agents lease cars because driving a new luxury car is necessary to attract certain clientele. Leasing is a smart option for these folks if they can't afford the purchase. That way, they can trade in the car for a new one every few years.
Dvorkin said his rule of thumb is to lease if you plan on replacing the car in four years, and to buy if you won't.
Another situation where leasing a car may be a good idea is if the driver is self-employed, because there are tax benefits.
"When you lease a car for all business use, the entire lease payment is deductible, along with the other costs," said CPA Alan Lips, a partner with South Florida accounting firm Gerson, Preston, Robinson & Co.
But even if you qualify for the tax write-offs, you should still check with your accountant — as you would with any big purchase — to see if the lease's benefits outweigh the drawbacks, Bielagus said.
For most other drivers, a leased car is an unnecessary drain. While it provides the comfort of a brand-new car and often includes perks like free oil changes and rental cars, there are many catches.
One is the mileage penalty — many leases stipulate that you drive less than 10,000 miles a year, but the average person drives at least 15,000 miles a year, Dvorkin said.
Another catch is the charge for damage to the car. There will be a warranty, but "normal wear-and-tear" will be defined by the lender.
"It'll spell it out, but unless you're a mechanic, you don't know that these things break often and these do not," Bielagus said.
Also, leases are notoriously hard to break or alter. You may be able to make the monthly payments now with your current $70,000-a-year job, but if you're laid off and your income falls to $35,000 a year, you're in a bind.
"To buy your way out of a lease can be very expensive," Bielagus said. If you buy a car, at least you're able to sell it.
So if you are self-employed, plan to get rid of your car in less than four years, or have a job that requires swank wheels, go ahead and lease. But do your research _ talk to an accountant, and get referrals from friends who are satisfied with their leases.
Otherwise, buy a new or used car that fits your budget.
