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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. 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 beaded on personal preference, whether it’s coffee versus tea or boxers versus briefs.

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

An obvious, often-misunderstood example is buying a car versus leasing a new 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 drive longer, but 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), making monthly payments until the lease expires.

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 if 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 down payment 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: 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, and 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 condition of the vehicle to have wear and tear above that 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.”

Another member of the Financial Literacy Commission, Clare Levison, notes that car payments will eventually end, whereas lease payments don’t until you turn in the car, leaving you with the choice of leasing again, or buying new or used. “With buying, eventually you will have paid the car off and no longer have the expense of the monthly payment.”

But a key question is “when”— and this depends entirely on how much money you have for a down payment. If you’ve saved up enough money, you know the end to purchase payments is within easier reach. A lower down payment means it will take much longer to pay off the car, though 0 percent financing means you won’t accrue extra interest charges in the meantime.

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.” In the meantime, though, you’ll pay increased costs to maintain the car as time goes on, though insurance rates will drop, too.

This is the single biggest downfall to leasing: Your long-term costs are much higher despite the lower monthly payment.

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 current promotion for a 2014 Honda Accord Sedan 2014 lease deal listed by Edmunds.com. 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.

The same vehicle has 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 comes 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 comes to $3,636 a year.

So, wait: 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 it in trade value to 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. So you would treat it like any luxury: Lease a car if you simply love driving a new car every three years and the cost is worth it to you. In other words, you make a conscious spending decision to spend more for you cars than you might have to.

Why is buying so much better?

Aside from the advantage of owning 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.”

Read more about the differences between buying and leasing or how to finance a car wisely. You can also check out our auto loan calculator.

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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. 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.

  2. 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..

  3. 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.

  4. 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.