After falling out of favor with consumers during the supply-challenged pandemic era, leasing a new car, truck or SUV, rather than paying cash or financing an outright purchase deal, is booming once more.
The market research firm Experian reports that leasing accounted for 24.03% of all new vehicle transactions in late 2024, compared to 16.67% recorded in 2022. With the average new vehicle transaction price approaching $50,000 and interest rates remaining relatively high, around 19% of buyers are now facing monthly loan payments of $1,000 or more. As a result, leasing is again being considered by a growing number of cash-strapped consumers as a way to make driving a shiny new model more affordable.
Automakers also love leasing as it brings new customers back to dealerships with clocklike regularity and helps dealers maintain an inventory of late-model used cars.
Among the top lease deals currently being offered in February, a Mazda CX-30 compact SUV is going for $199 per month for 33 months with $4,449 due at signing, while the Subaru Outback wagon can be driven off the lot at $299 per month for 36 months with $3,049 down. Need something larger? The three-row Hyundai Santa Fe SUV can be had for $329 per month for 36 months with $3,999 up front, and the popular Chevrolet Silverado 1500 entices full-size pickup truck fans at $409 for 26 months with $5,979 due at signing.
The allure here is that rather than financing a vehicle’s entire selling price, a consumer only pays to use a leased vehicle for a specific period, which is usually two or three years. Payments are based on the difference between a vehicle’s transaction price (also known as its capitalized cost) and what the car or truck is estimated to be worth at the end of the lease (its residual value), financed at the going rate of interest (called a lease rate, lease charge or money factor).
Not only does this keep monthly outlays lower, leases generally require a more-modest down payment (known here as a capitalized cost reduction) and the first month’s installment at signing, along with the sales tax, annual vehicle registration fees and taxes, maintenance and insurance and other applicable fees. Usually included as part of the deal, so-called gap insurance (it stands for guaranteed automobile protection) covers the remaining lease payments if a leased car is stolen or totaled in a wreck
Leasing tends to favor those who like to change their vehicles with the same frequency as their mobile phones to ensure they have the latest technology at hand, or who anticipate life changes down the road (like having children) that would warrant obtaining a different car. Leasing can be especially beneficial to those who can claim their car or truck as a business expense, since most leasing charges attributed to professional purposes can be deducted on a dollar-for-dollar basis instead of a per-mile-driven amount (but be sure to consult a tax advisor before proceeding, however).
Take note that automakers and leasing companies will often manipulate certain provisions of an agreement to help sweeten the deal on slower-selling models. Called subventing, this often involves subsidizing a lower interest rate, artificially inflating a vehicle’s residual value or offering a leasing bonus that works like a cash rebate to lower the required down payment and/or monthly outlay. Some “sign then drive” promotional deals let lessees avoid having to make the down payment and often the first month’s installment, though this generally requires heftier monthly outlays to make up for it.
At the end of the term the lessee can simply hand the car or truck back to the dealership (typically along with a small disposition fee) and walk away without having to worry about haggling over a trade-in value or initiating a private-party sale. Alternately, a leased vehicle can be purchased for its predetermined buyout price as stated in the contract. If the vehicle’s actual resale value is greater than the buyout, an astute lessee can come out ahead on the deal by electing to find a dealer that’s willing to purchase the leased vehicle at its current value, which enables him or her to pocket any amount in excess of the buyout figure.
Note that unless otherwise specified, advertised lease deals are usually for base models in a given car or truck line; adding options and/or choosing a higher trim level will result in costlier payments. At that, realize that virtually every aspect of a lease is open to negotiation, and this includes a vehicle’s transaction price. Haggling the out-the-door cost below the manufacturer’s suggested retail price will help lower lease payments. Also, making a larger down payment and/or settling for fewer annual miles allowed will typically result in a more-affordable monthly expenditure. Conversely, putting less cash down initially and/or allowing more miles per year will drive up costs.
Of note, automakers who sell electric-car and truck models that would not otherwise qualify for the one-time $7,500 federal tax credit have found a way to leverage a loophole in the legislation that allows their customers to take advantage of the incentive and they’re doing it via their leasing programs. Part of the bill that selectively restored the tax credits extended them without the aforementioned exceptions to commercial leasing entities (in this case a participating automaker’s financing division) that can claim the tax credit and pass it along to a lessee to reduce his or her cash due at signing and/or monthly payments.
Leasing Pitfalls To Ponder
Unfortunately, leasing is not for everyone. For starters, leasing virtually means having to make perpetual car payments, though to consumers who prefer to drive vehicles having the latest technology, this can be an asset. Since there’s no resale value to be had when the lease expires, there’s no equity to leverage for a down payment on a subsequent car or truck, except in the aforementioned instance when the vehicle is worth more than its stated residual value.
One major roadblock is that the best lease deals are typically reserved for “well qualified” consumers, which means those having prime lending histories and who meet applicable income levels. Those who have lower credit scores, but still have sufficient income to qualify, could be charged a higher interest rate, be subject to a larger down payment and/or be required to post a refundable security deposit, all of which would translate into higher monthly payments. Those cited for frequent late payments and/or defaults may be denied altogether.
Also, leasing is not a good idea for those who tend to drive an excessive number of miles. That’s because new-vehicle leases are subject to strict mileage limitations, which can be as few as 10,000 annual miles or less with the sweetest deals (newer vehicles returned with fewer miles on the odometer are worth more and usually require less reconditioning). Exceeding the total allowed miles at the end of the term will subject a lessee to a penalty that’s typically between 15 and 30 cents per mile. That means racking up an additional 10,000 miles more than the contract allows would require paying between $1,500 and $3,000 in excess mileage fees when returning the vehicle. However, those who expect to be put on additional miles can usually purchase them in advance at a discounted rate or simply negotiate a lease that grants a higher mileage threshold in the first place.
On the other hand, consumers who drive only a modest number of miles per year, such as those working from home or taking public transportation for their daily commute, may find that leases with lower annual mileage allowances deliver the most value. After all, there’s no point in a lessee paying for far more miles then he or she will ever use. Still, this amounts to what could be a costly crap shoot and it may be worth it to err on the side of caution.
Likewise, those who tend to be particularly hard on a car should think twice before leasing one. Leased vehicles must be returned in excellent condition, without dents, deep scratches, window cracks, or torn/stained upholstery, and with all accessories in good working order; to avoid fees for excessive wear and tear. Since a dealership’s service department is generally the most expensive route to go for repairs and reconditioning, it may be more affordable to have a leased vehicle in need of work taken care of by a local mechanic or body shop ahead of time. At the least, it pays to have the vehicle deep cleaned inside and out to help make it look as new as possible before getting the final once-over.
Importantly, leases are binding for the entire length of the agreement, and they can be difficult and/or expensive to terminate, even if one loses a job or goes through a divorce and can’t make the payments. Traditionally, those who want to get out of a lease early are either required to lease another vehicle and have the first contract “bought out” as part of the deal, or face a prohibitively hefty termination fee. Fortunately, firms like Swapalease.com and LeaseTrader.com have established online marketplaces in recent years through which consumers can transfer their leases – for a fee – to other parties seeking short-term vehicle leases.
