A car lease can give you a brand-new car for a substantially low monthly payment. Then what’s not to like in this? Probably everything! This article deals with the many reasons why you should never lease or rent a car.
Our personal preferences determine the type of choices we make. However, some financial choices aren’t so clear. After all, we can’t be making spending decisions based on preference alone. If we keep doing so, then we might all be living in luxury for a brief period before landing in bankruptcy.
- 1 Why are Leases So Tempting?
Leasing Vs. Buying a New Car
An obvious and often misunderstood example of financial decisions is buying versus leasing a car. The decision to buy or lease a car seems like one depending on the preference: Would you like to drive a brand new car at a relatively low monthly payment or finance a car that you’ll eventually own outright?
Of course, you have to remind yourself 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.
However, many people aren’t in as good a position to pay cash for their cars, and auto loans are the only way out to afford one. Leases, by contrast, are a different ball game altogether. They allow you to drive a car for a fixed period of time (often three years) while making monthly payments until the lease expires.
Why are Leases So Tempting?
“Probably the biggest advantage of leasing is a lower payment,” says Jerry Love, a member of the National CPA Financial Literacy Commission. “If you are planning to keep the car only a few years — say three years max — then leasing provides for a smaller payment, and you don’t even have to worry about the trade-in value.”
The latter concern is extremely important in the case of cars because new cars depreciate the moment you drive them off the lot. Whereas a lease allows you to get a new car every few years, those purchasing a new car are likely to hold on to it for much longer, while its value drops with each passing year until it’s time for a trade-in.
“The initial cost of purchasing is higher than leasing as it 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 very easy to see why leases are so attractive: You can get a brand new car and a monthly payment that’s lower than a car loan.
Read More: 5 Best Ways To Sell Your Car
However, Leases Are A Peril In Disguise:
First of all, leases have mileage limits where you get a penalty if you drive over that set amount. These penalties can range from as low as five to as high as 20 cents a mile. Therefore, it’s important to plan ahead of time how you’ll use the car i.e. for short- or long-distance driving. Be very clear about what those mileage limits are. A cap of 40,000 miles will give you more wiggle room than 30,000, but you’ll have to pay extra up front.
There’s more to it. A car lease allows for normal wear to the car, but “if the dealership considers the vehicle to have wear and tear above a normal level at the end of the lease, they can charge you extra”. You can get a good idea of what “normal wear” means by asking the car dealership and studying the lease terms.
This is Why Buying a Car is Better:
If the dealership is offering good low-cost financing, and you plan on driving the car for a long time, buying is the way to go. If the financing cost is higher then check with credit unions as they will have a favorable rate. And if you have a good banking relationship, you can always check with them for their rate.
Car payments are eventually going to end, whereas lease payments won’t until you turn in the car. While choosing to buy a car, eventually you will have paid the car off and no longer has the expense of the monthly payment.”
When leasing a car, you make payments for a specified period of time, and then at the end of the term, you can show nothing for the money you spent. Car leases leave you owning nothing. However, when you buy a car, at the end of the term, you are the owner of the car. You can plan to keep that car indefinitely or even sell that car for the value.”
Leasing Versus Buying For Six Years
You need to see the numbers to believe in this theory.
The following is a promotion for a 2014 Honda Accord Sedan 2014 lease deal list on a website. It says that after $1,999 down payment, the lease payments are just $199 a month for a 36-month, 36,000-mile lease. Eventually, the total cost for three years comes to $9,163. If you found a similar lease again for another three years then your total cost comes to $18,326, or $3,054 a year for six years.
The same model had a target price of $20,840 according to a popular car pricing service website. If you put the same $1,999 down and had you financed the car for 48 months at 2.5 percent, your monthly payment would have amounted to $412.88.
At the end of this four-year loan, the total cost for purchasing the car (including the interest) comes down to $21,817 and over a period of six years, your annual cost would come to $3,636 a year.
Leasing is Way Cheaper, Almost $600 a Year! Is This What You’re Thinking?
But are you not forgetting something? As soon as the loan is paid off, you own your car. You now have an asset. The model has taken into consideration, a 2008 Honda Accord LX in mid-grade condition, fetches about $10,000 on the private market.
So whether you choose to sell the car or apply the trade-in value you get toward your next purchase, your actual cost of ownership is reduced to $11,817 or $1,969 a year. That’s equivalent to a savings of $1,085 a year and $6,508 over six years.
One of the drawbacks of buying a car is the need for regular maintenance as it gets older. However, the savings over leasing should be enough to cover for it.
When is Leasing A Smart Option?
Here’s a harsh truth: leasing doesn’t make financial sense for a lot of people. Buying a car is eventually almost always better than leasing a car.
However, there are some exceptions. For business owners or others who can deduct certain vehicle costs, leasing can prove to be a good option. However, for everyone else, leasing a car should only be considered a luxury.
If you simply love driving a new car every three years and the cost is worth it to you, then go on and lease a car. As long as you’re aware of the costs incurred, it’s fine to make a conscious decision to spend more on your cars than might be necessary.
Apart from the advantage of ownership giving you an asset, even if it’s a depreciated one, there are a few more variables to be taken into account. The annual insurance cost on a leased car is usually higher than for a purchased car. Also, the driver of a leased car has to pay personal property tax on the car. While in some states, there is absolutely no personal property tax owed on a car that you are purchasing.
Hence, choose your options wisely. Buying is always a better option when you have to purchase a car for personal purposes. Hence, neglecting a few exceptions, you should almost never lease a car.