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Why You Should (Almost) Never Lease A Car

A car lease gives you a brand-new car for a low monthly payment; what’s not to like? Everything. Here are the many reasons why you should never lease a car.


Car leases are tempting: You get brand new wheels for a low monthly payment. Financially, however, it's a terrible idea.We make choices every day based on personal preference: coffee versus tea; boxers versus briefs; etc.

Some financial choices, however, aren’t so clear cut. After all, we can’t make spending decisions based on preference alone. If we did, we might all be living in luxury for a brief period before landing in bankruptcy.

An obvious, often-misunderstood example is buying versus leasing a car. The decision to buy or lease a car seems like one of preference: Would you rather always drive a new car at a relatively low monthly payment or finance a car that you’ll someday own outright?

Of course we have to remind you that, financially, the best way to buy a car is to pay cash for something pre-owned to avoid paying both interest and off-the-lot depreciation.

That said, many people aren’t in a position to pay cash for their cars, and auto loans make this possible. Leases, by contrast, allow you to drive a car for a fixed period of time (often three years) while making monthly payments until the lease expires.

Related: Car affordability calculator

Why leases are so tempting

“Probably the main advantage to leasing is a lower payment,” says Jerry Love, a member of the National CPA Financial Literacy Commission. “If you plan to keep the car only a few years — say three years max — then leasing allows you a smaller payment, and you don’t have to worry about the trade-in value.”

The latter concern is important because new cars depreciate the moment you drive them off the lot. And whereas a lease allows you to get a new car every few years, those purchasing a new car will likely hold on to it for much longer, its value dropping with each passing year until it’s time for a trade in.

“The initial cost of purchasing is higher than leasing; this includes a downpayment as well as a higher monthly payment,” says Allyson Baumeister, a member of the Texas Society of Certified Public Accountants.

For somebody on a budget, it’s easy to see why leases are so tempting: You get a brand new car and a monthly payment that’s lower than a car loan.

But leases are a devil in disguise.

For one, leases have mileage limits where you’re penalized if you drive over that set amount; these penalties can range from five to 20 cents a mile. It’s important to determine ahead of time how you’ll use the car (for short- or long-distance driving) and what those mileage limits are. A cap of 40,000 miles will allow you more wiggle room than 30,000, but you’ll pay extra up front.

What’s more, a lease allows for normal wear to the car, but “if the dealership considers the … the vehicle to have wear and tear above [normal] at the end of the lease, they can charge you extra,” Love says. You can get a better idea of what “normal wear” means by quizzing the car dealership and studying the lease terms.

Why buying is better

Love notes that if the dealership is offering 0 percent financing, and you plan on driving the car for a long time, buying is the way to go. If the financing terms are higher, “Frequently, credit unions will have a favorable rate. And if you have an established banking relationship, you should absolutely check with them for their rate.”

Related: A case for local banks and credit unions

Another member of the Financial Literacy Commission, Clare Levison, notes that car payments will eventually end, whereas lease payments won’t until you turn in the car.  “With buying, eventually you will have paid the car off and no longer have the expense of the monthly payment.”

Regardless, “When you lease a car, you make payments for a specified period of time and then at the end of the term you have nothing to show for your money,” Baumeister says. “You own nothing. However, when you buy a car, at the end of the term, you own a car.  You can keep that car indefinitely or sell that car for value.”

Related: Auto financing for smart people: tips for saving on your car loan

An example: Buying vs. leasing for six years

Some people need to see the numbers, so we looked long and hard for a lease deal that would seem to beat out buying.

We found a promotion for a 2014 Honda Accord Sedan 2014 lease deal listed by Edmunds.com (you can find similar deals here). After $1,999 down, the lease payments are just $199 a month for a 36-month, 36,000 mile lease. The total cost for three years comes to $9,163. Let’s assume you found a similar lease again for another three years. Your total cost comes to $18,326, or $3,054 a year for six years.

The same vehicle had a target price of $20,840 according to car pricing service TrueCar.com. If you put the same $1,999 down and financed the car for 48 months at 2.5 percent, your monthly payment would come to $412.88. At the end of the four-year loan, the total cost to purchase the car (including interest) comes to $21,817. Over six years, your annual cost would come to $3,636 a year.

So far it seems like leasing is way cheaper … by almost $600 a year!

But we’re forgetting something: After the loan is paid off, you own your car. You have an asset. According to Kelly Blue Book, a 2008 Honda Accord LX in mid-grade condition fetches about $10,000 on the private market. So whether you sell the car or apply the trade-in value toward your next purchase, your actual cost of ownership is reduced to $11,817 or $1,969 a year. That’s a savings of $1,085 a year and $6,508 over six years.

Although one of the drawbacks to buying a car is the need for more regular maintenance as it gets older, the savings over leasing should provide plenty of cash leftover.

Is leasing ever a smart option?

Here’s the ugly truth: For most people, leasing doesn’t make financial sense. “Buying a car is almost always better than leasing a car,” Baumeister stresses.

There are some exceptions for business owners or others who can deduct certain vehicle costs. For everyone else, leasing a car should be considered a luxury.

Lease a car if you simply love driving a new car every three years and the cost is worth it to you. As long as you’re aware, it’s fine to make a conscious decision to spend more for your cars than might be necessary.

Related: When it’s okay to spend money

Summary

Why is buying so much better?

Aside from the advantage of ownership giving you an asset — even if it’s a depreciated one — there are other monetary variables to take into account. “The annual insurance cost for a leased car is usually higher than for a purchased car,” Baumeister says. “Also, the driver of a leased car must pay personal property tax on the car. In some states, no personal property tax is owed on a car that you are purchasing.  This tax is many times only included in the fine print of a lease contract.”

No matter which option you choose, shop around. Especially with a purchase, “The exact price of the vehicle can vary greatly within your region of the country,” Love says. “The terms of a lease or terms of the note can vary greatly, too. Do some research to identify an expected price, then walk into a dealership equipped with the information.”

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About Lou Carlozo

Based in Chicago, Lou Carlozo is a personal finance contributor for Reuters Money, a columnist with DealNews.com, and a former managing editor at AOL's WalletPop.com. Contact him with story ideas for Money Under 30 at feedbacker@aol.com, or follow him via LinkedIn and Twitter (@LouCarlozo63).

Comments

  1. Joseph Rasero says:

    How much do you drive and what does driving mean to you? Is driving A to B no nonsense or is driving a luxury. Yes leasing will cost more compared to buying a used car or buying new but like many posters have stated there are benefits of leasing but first ask yourself how much do you drive, how long do you think you need a car, and what condition do you keep your cars in?

    If you drive 15k miles a year or less leasing might be good for you. If you plan or can afford payments for 36 or less months than leasing might be good. If you garage park and or keep your car in perfect shape leasing might be good for you.

    1st great thing about leasing is at the end of the lease you have the ability to simply turn in the car with no problems unless there is excess miles, wear and tear, and normally there is a turnin fee.

    2nd. Warranty and sometimes even maintance is covered during the lease.

    3rd. Lower monthly payments compared to buying new with less if not no money down

    4th. Equity can happen if the car is in great shape aND less miles are driven that paid for

    5th. Residual value or buyback price can offer a great deal on a car that you know 100 percent of the cars history. My lease of a 2016 acura rdx base awd 15k yearly 36 months has a buyback $23,300. A three year old 2013 acura rdx awd base goes for $29.500,

    Now if I bought a used 2013 acura base to begin with you save thousands but you have a used car with a limited warranty. Repair costs and car value come into play with a used car. If I buy a 2013 rdx base with 30k miles on it I will probably receive 1 year left of the warranty since the car was made in 2012. Also let’s say I finance it for 48 months. I put 10k a year. At the end or the financing the car would have at least 70k

  2. This article makes some good points about the advantages of buying, but really disregards many of the advantages of leasing.

    First, there’s typically the option to buy at the end of a lease, which is a valuable choice to have. If the car is still worth $15,000, but you have the option to buy at $12,000, obviously you aren’t going to just trade it in if the dealer isn’t giving you anything. Second, if you do assume that someone trades in the car at the end and leases a new vehicle again, presumably they save a lot of money and inconvenience dealing with maintenance.

  3. When you buy your car and finished making payments and are stuck with no warranty, then what? Your transmission goes out and you are stuck with a $5k repair bill like the last car I owned. During my last lease, the car was in a wreck twice and both times not my fault. Had I owned that car, good luck trying to sell it with two accidents showing up on Carfax. With a lease, I just turned it in. If you are the kind of person that doesn’t mind driving and old car with no warranty, then buy. Otherwise, leasing offers a lot of benefits. You can still purchase the car at lease end and a short lease will really let you find out if your really like the vehicle or not. Also when you lease, you don’t pay all the sales tax up front, you just pay a portion each month. Lease all the way.

  4. This article makes a number of assumptions which are entirely NOT TRUE. Leasing DOES make sense in a wide number of situations and the old adage that you are left with nothing at the end of the lease is not entirely true.

    + In the “numbers” example above the author neglected to tell you that you absolutely MUST negotiate your purchase price exactly the same way with a lease as you would a purchase. The lease rates are based off of MSRP usually and will be lower based on the price you actually pay. NEVER PAY MSRP.

    + At the end of your lease you do have the option to buy the car at the pre-set residual value, usually about 50%-65% of purchase price. You have effectively paid for the depreciation up to this point. If the car has depreciated more than estimated you can walk away without eating further depreciation. Also, if the car has depreciated less than expected (say you drove much less than the mileage you paid for) it could be worth more than the residual. You can sell the car yourself instead of turning it in and make some money or purchase at a nice discount if you want to keep it for longer.

    Leasing vs Buying isn’t a simple choice. There are a ton of factors at play and those individual factors will determine what makes the most sense for you.

  5. LikeToDriveFastCars says:

    How about leasing a BMW, Mercedes, or Audi. The cars are notorious for failing after there warranty. Most say that is $1000 visit for any work that has to be done on the car. I think at this point if you like to drive “nice” cars then it may make sense to lease.

  6. In hindsight for me leasing would have been a better option. I bought a used car one year ago and was thankfully able to pay it off quickly. I only drove it on the weekenda and on long vacatiob trips adding only 5k miles. The challenge is I was relocated to a major city cross country and now have to sell my car after 1 year.

    Returning to the dealer I would lose over 30% of the purchase price simply because that was their markup margin and taxes. Now I am trying to sell it at Kelly Blue book for a 20% loss.

  7. But if you prefer to drive luxury cars, it is much better to lease, because you save on the high maintenance cost that will start after the third year, also you save on the taxes, when you lease you pay taxes only on the amount you leased (%45) instead of accruing taxes on the full price even if you decide to sell it before paying it off.
    Plus, leasing deals are much more competitive than purchasing deals with cars besides Honda . So I agree that lease could be better for some, but those have to be committed to keep driving the same economy car for a long time, something not common among Americans.
    Either way, car dealership are the scum of the society when it comes to honesty and truthfulness, so need to be careful either way..

  8. Hi Lou,

    Would you recommend this advice for buying a house vs renting as well?

    More importantly, many of the numbers in your example don’t line up. The down payments don’t match up. You mention a 5 year loan but then calculate a 4 year loan.

    Most importantly, you ignore repair and maintenance which Kelly Blue Book puts at ~$4000 for 5 years so probably almost $5000 for 6 years which reduces your savings by quite a bit.

    • David Weliver says:

      Hi Dan,

      There were a couple typos in the numbers when first published that have been corrected. The example uses a $1,999 down payment for both lease and purchase and uses a 4 year (48) month loan. The bottom line savings (buy vs lease) is still around $6k. Even with a liberal allowance for $5k in maintenance over six years, you still come out ahead. It *is* close when you factor in maintenance — but the example we used is also a fairly competitive lease deal.

      To answer your first question: no. The logic here is only about cars — renting vs buying a home is a totally different animal in which both have advantages and disadvantages depending on your circumstances. Often, it can be smart to rent: http://www.moneyunder30.com/renting-is-not-wasted-money

      Thanks for commenting.

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