When Leasing Makes Sense

The world of new-car shoppers is divided into two camps: those who buy and those who lease. Buyers like the peace of mind of owning their vehicle and knowing that if they pay cash or keep the car past the loan payoff date, they'll likely come out ahead financially. Yes, you're on the hook for repairs after the warranty expires, but repairs are likely to cost less each year than car payments.

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Lessees love the flexibility to trade up frequently to a brand-new set of wheels. More than one-fourth of new-car transactions in 2014 were leases, and the percentage is rising. Matt Jones, of Edmunds.com, says part of the reason is a new mentality among shoppers. "You have a new generation that isn't as invested in the idea of personal ownership."

The case for leasing. If you always have a car payment—because you trade in your cars often or you tend to finance with long-term loans—then leasing is a good choice. Because you're paying for a car's depreciation only over the term of the lease, your payments are lower than if you financed the entire cost. The majority of leases are written for three years, so a leased vehicle is almost always under warranty.

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Suppose you buy a 2015 Chevrolet Malibu 1LT for $24,560 with a five-year loan and 10% down. With Chevy's 2.9% financing offer, your payments will be $396 a month. Now suppose you get the itch to buy a new car after three years. If you trade in the Malibu, you will likely get about 50% of the sticker price, or $12,280, according to Kelley Blue Book's estimated resale value. After you pay off the loan, your total out-of-pocket cost will be about $13,290.

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However, you can lease the same Malibu for $179 a month for three years with $1,209 down. Your cost will be about $8,650 over three years, including the fees leasing companies impose—a front-end acquisition fee ($600 to $800) and a back-end disposition fee (about $350). Leasing leaves you more than $4,600 richer. The scales tip back in favor of buying when a vehicle has higher-than-average resale values, because you'll get more when you trade it in.

Leasing does come with strings attached. Excess wear and tear will cost you, although leasing companies usually don't charge for scratches or a less-than-pristine interior. Plus, mileage is typically capped at 12,000 to 15,000 miles per year, and you'll pay about 20 cents per extra mile at the end of the lease. You can negotiate a high-mileage lease—up to 30,000 miles per year—but you'll pay extra for the increased depreciation.

Keep in mind, however, that when you buy a car, high mileage, customization, and dents and dings also drag down its value. The money comes out of your pocket when you sell. Also, if you decide to trade in a vehicle, you may get less than you anticipated if its value suddenly drops—as SUV values did when gas spiked to $4 a gallon in 2008 and owners dumped them en masse.

If you want to get out of a lease, there are ways to do it without paying an early-termination fee. A dealer may contact you for a "pull-ahead program," which lets you return your car to the dealer and lease a new car, often at more-favorable terms. (Dealers sell your previous car as a certified pre-owned vehicle.) Or you could sell the car yourself and walk away from your lease with a check in your hand if your vehicle is worth more than the purchase price written into the lease (see our story Cash Out Your Lease on Your Car).

LeaseTrader.com and SwapALease.com match lessees who want to exit early with shoppers looking to pick up a short-term lease (cost for the service: $100 to $350). Because the remainder of the lease payments will be made, you won't pay an early-termination fee.

Ask Jessica a question at janderson@kiplinger.com, or follow her on Facebook.