The never-ending car payment: Leasing pros and cons

Car payments have morphed from a temporary nuisance into a permanent part of many people’s budgets. Whether that’s a bad thing depends on what you do with the rest of your money.

One-third of millennial car buyers chose a lease last year, which helped push auto lease volume to a record of 4.3 million and 31 percent of all new auto purchases, according to market research by Edmunds.com.

Lease payments are typically lower than monthly loan payments for the same car, and leasing is less expensive than buying new cars every two or three years. But leasing is far from frugal, especially compared with paying off a car within five years and owning it for a few more. People who lease don’t get a break from payments or build equity toward the next purchase.

But younger buyers in particular are more likely to view cars as technology that needs to be continually upgraded, says Jessica Caldwell, executive director of strategic analytics at Edmunds.com.

“It used to be cars didn’t change that much in five years. Now they do,” she says.

Fear of repair bills contributes to the leasing trend as well. Many people would rather have constant payments and continually drive newer cars than be surprised by repair costs.

Leasing certainly can be a better financial choice than some other financing options. Auto loans that stretch six years or more mean buyers often face big repair bills while they’re still making payments.

If you’re leaning toward leasing, keep in mind:

• Don’t overspend. Any car payment, whether on a loan or a lease, needs to fit in with more important financial priorities such as saving for retirement and paying off debt. If your payment pushes your “must-have” expenses — such as shelter, transportation, food, utilities, insurance and other minimum loan payments — to over 50 percent of your after-tax income, you probably can’t afford it. Consider buying a less expensive new car or a reliable older model instead.
• Have a cushion. Car repairs are typically covered under warranty when you lease, but you may face extra charges at the end for excessive mileage, bald tires or wear and tear, especially if you are not leasing another vehicle of the same make.
• Negotiate hard. Experts recommend that you negotiate the purchase price of the car as if you plan to buy it, and discuss leasing only after you get a firm price. Down payment, mileage allowance and after-lease purchase price can be haggled, as well.