Tips on Leasing a car – FIVE PROS and CONS

OK, so your thinking of leasing your next vehicle and everyone you have talked to has a different opinion right?  In this article I will break down the pros and cons of leasing and leave you with a tip that can save you hundreds if not thousands of dollars.

The 5 pros to leasing a vehicle are the following:

  • Shorter cycle for getting a newer vehicle This is pretty obvious but if you lease for 12,24,36,39 or 48 months you wouldn’t feel like you had to wait out the length of the typical finance term of 60 or 72 months.
  • You pay only for what you use If your lease is contracted for you to drive 10,000 miles per year then your monthly payment would reflect a reduction as compared to 12,500 or 15,000 miles per year.  Also, a big factor when trading in your vehicle is the age and up front you and the lessor will know how long you will be driving the car so that’s all you are obligated to pay for (unless you don’t return it).
  • In some states you pay tax on only the payment and not the purchase You will see this in the “con” section as well.  Paying tax on the payment significantly reduces your tax obligation.  If your tax rate is 8% and you lease a vehicle at $400 per month your tax would be an additional $32 dollars per month. That’s it.  Again, this is state specific.
  • Tax benefits for business leasing Please talk to your CPA or Attorney regarding this but typically under the law in 2010 a business can deduct 100% on a lease regardless of the vehicle’s GVW (weight).  So, you don’t have to worry about buying a large vehicle for your business just so you can “write it off”.
  • Warranty & Maintenance Typically since your buying the vehicle NEW, the warranty covers much if not all of the duration of the lease.  This is pretty obvious but is often overlooked.  If your lease expires after the warranty then to cover the gap is rather inexpensive. Also, some manufacturers include maintenance during the lease period.  If the manufacturer doesn’t cover it, ask the dealer to.  Typically, this isn’t hard to negotiate for as it can be expensed over time at a dealership.

The 5 cons to leasing a vehicle are the following:

  • You don’t own the vehicle when leasing When you figure your net worth don’t count on a lease helping you. Leasing will never be a true asset.  It’s a liability.  At the end of the lease term you have the option to buy your lease or return it.  If you buy it, you may be shocked when you figure how much you’re truly paying for the vehicle.  It’s always sad paying two to four years on something and walking away empty handed.
  • Taxes on a auto lease In some states, like Illinois, taxes are figured on BOTH the total purchase price of the vehicle AND the payment, PLUS if you live in specific cities or counties you can get hit with an additional 1-2 percent.  For example, if you lease a $20k Honda Civic and your taxes are 8 percent then would pay $21,600 for the vehicle AND 8% on a monthly payment.  If your payment is $300 per month then your obligation is $324 per month.  Over a 36 month lease you would have paid 50% more in tax NOT including additional county/city tax. Ouch.  Also, with leasing the tax is typically figured based on where the vehicle will be garaged, and not where you bought it.
  • You pay for what you MISUSE in a lease Whereas the fact that you “pay for what you use” holds true with a lease, you also pay for what you MISUSE as well.  So, if you get a couple door dings or dents then chances are you will have to get them fixed or pay for them after the fact.  If your tires are bare from misuse then guess what? You will have to get new tires.
  • Watching your miles in a lease Be realistic if you decide to lease. Hoping to cut your driving in half while keeping a similar commute and lifestyle may be costly in the end.  Look at your current vehicle and divide by the months you have owned or leased it then multiply by 12 and add 1000 miles to that for cushion.  The last thing you want is the feeling that your vehicle cant be driven and has to stay in the garage due to a miles overage.
  • Trading in your lease to either buy or lease another vehicle As to the earlier point you will not typically have equity when leasing so when you show up at the dealer to trade in your lease you will have to pay the remaining lease obligation or try and get the dealer to buy it out from you.  There are generally two pay-offs when figuring the remaining obligation.
    • The first payoff is the payments and interest the customer owes to the lessor.
    • The second available payoff is what monetary amount it would take to own the vehicle.  Typically, in either instance, you couldn’t use the value to off set the taxes of the new lease or purchase.  In many states, you pay taxes on the difference of what you are buying and selling.  With leasing since you never owned the vehicle you don’t get to claim that tax credit.

Auto Leasing TIP to SAVE you MONEY***

If you live in a state that charges tax on the total amount of the vehicle price and NOT just the payment AND you plan on leasing your next vehicle then this tip applies to you! The dealership, assuming they have taken in lease returns within the last 6-12 months will have TAX CREDITS that they can and may use to off set YOUR taxes.  However, most dealers will increase the price of the vehicle and show less tax.  So, if you agree on a selling price of $40,000 and there is $3200 in tax then the dealer may show the purchase price of $43,200 and then $0 for the tax.  In this scenario you truly don’t lose or gain BUT the dealership does.  Look at what happens- the dealership just made an extra $3200 dollars and because they used the tax credit has no obligation to pay the sales tax.  These monies can be negotiated.  Be fair though as dealers do need to keep their lights on.

December 29, 2010 by Jamie Rettig