Does car leasing work for young families?

The cheapest way to buy a car is to pay cash.  Unfortunately, that isn’t an option for many young families which means the choice comes down to financing or leasing.

It's easy to see why a car lease makes sense for cash-strapped families.  Monthly lease payments can be up to 35 per cent less than the payment with a financed vehicle.  This was the biggest factor when we decided to lease a car four years ago.

But consumers shouldn't be fooled by lower lease payments alone.  When the car lease expires, you need to consider buying out the vehicle or starting a new cycle of lease payments.

There are some other advantages to leasing:

• The ability to drive more car for less.  I priced  a 2012 Honda Odyssey online and the monthly payment on a 48-month lease was $470, compared to $628 per month when financing for 60 months with zero down payment;
• The option to return the vehicle to the dealer or purchase the vehicle at the end of the lease;
• Avoid the opportunity cost of tying up your money in a vehicle.

On the downside:

• The longer your vehicle is on lease, the higher your overall carrying costs will be.  A 2012 Honda Odyssey that's leased and bought out at the end of the term will cost nearly $2,000 more on a 48-month lease than on a 36-month lease;
• You are restricted to a set amount of kilometres, typically 20,000-24,000 per year;
• You have less freedom when it comes to servicing and making any modifications to the vehicle;
• With a car lease, you're basically just renting the vehicle and delaying the cost of ownership

I asked Geoff Cudd, owner of How to Buy a Car at the Best Possible Price, if leasing makes sense for young families.  He pointed out that most of the time leasing a car is only a smart move when you can write off the payments as a business expense.  A car lease for personal use will usually cost you more money than financing in the long run.

“However, like renting a house for a few years, a car lease can be a smart short term strategy if you can’t afford to buy today," added Geoff.  "You may want to defer ownership if your financial picture will be different in a few years.  Leasing is certainly a reasonable strategy while you build up your bank account.  Just don’t use it as an excuse to get more of a car than you can really afford.”

I'm happy with our decision to lease, even though we paid a bit more in the long run.  We plan on buying out our vehicle when the lease expires in June and then driving it for another 8-10 years.

For a young family needing a safe new vehicle to get around in, a car lease can help in the first few years while you get a handle on your finances.  Just make sure you have an exit strategy so you don't get trapped in a continuous cycle of leasing or financing vehicles. 

Also Read:

Should you buy your off-lease car?

How to lower your car insurance premiums

Robb Engen is half of the Boomer & Echo personal finance blogging team with his mother, a former financial advisor.  You can reach him by email at robbengen@gmail.com.