I thought I’d pick another semi-controversial topic for my post this week. Why? Because I love the debate and discussion, and ultimately the gained education from bringing up these topics with you guys. You’re a smart bunch and you’re always willing to share with each other. Plus I always learn some new perspectives on things. Today, I want to share my thoughts on car leases and why they make absolutely no financial sense. I know, I know – I’m just begging for some of you to disagree with me before I even get started. But that’s exactly why the comments section is at the END of the post.
Just to be sure we’re working from the same definition; let me give you a quick run-down of what an auto lease actually is. In simplest terms, an auto lease is a long-term rental agreement between you and a car company. You make monthly payments and take care of the car but technically the car company still owns it. At the end of an agreed-upon lease term (usually two or three years), you have the option to purchase the car at its “residual value” (fancy term for the amount the car company estimated its market value would be at the end of the lease) or turn the car back in. See – you don’t own a leased car – you simply “rent” it.
So why is this a bad financial plan? Let me get to that part after I mention a few good things about leasing a vehicle:
- You get to drive a new car – For less money than what it would cost to purchase a new car outright, you can drive a new car every few years through having ongoing leases.
- Fewer secondary costs – Usually the down payment on a lease is lower (sometimes not even required). Sales/property taxes in most states are a lot lower on a lease because you only pay for the value of what you’re using, not the full value of the car. If used in a business, income taxes can be offset by a deduction for a leased vehicle.
- Fewer Maintenance Problems – This is strictly related to the fact that you’re driving a new car with factory warranty. Statistically speaking a new car with warranty will cost less in maintenance than a used car that has lived out its warranty period.
Now that I’ve given you all the pros I can come up with about a lease, I have to beat the idea down:
- Costs more if you decide to buy – Car companies are smart enough to set the residual value to a number in their favor, meaning if you decide to buy the car at the end of the lease, you will DEFINITELY pay more for it.
- Mileage limits – Leases almost always come with mileage limits. Most leases that I’ve dealt with allow 12,000 miles per year. If you sign a 3-year lease and get ready to turn that car back in with 40,000 miles on it, you’ll have to pay a fee for the 4,000 miles you drove over the allowed limit on that lease.
- Repossession concerns – This one is just like a purchase, but worth mentioning. Since you’re making payments, miss one or two and you might find the car missing because the company repossessed it. They’ll sell it at auction and expect you to cover the losses.
- Responsibility for repair – Even though you don’t own the car, if something breaks that isn’t covered by warranty, you’re responsible to fix it.
- Limitations on changes/upgrades – Want to add pinstriping or a spoiler to your car? Maybe replace that factory radio with something a bit nicer? Lease terms may say you’re not allowed.
- Gotchas – There will be a lot of paperwork you’ll have to sign to start a lease. Terms like “normal wear and tear” are pretty subjective. You might have to pay if the car isn’t in tip-top shape when you’re done with it.
- You NEVER own It – Even if you have to make payments on a purchase, you eventually get to the end of your payment book and can claim that piece of metal as your very own. With a lease, you get no such hope unless you decide to overpay for it AFTER the lease.
- Rich people don’t do it – Rich people (not people that LOOK rich, but those that actually ARE rich), don’t drive leased vehicles. They buy cars and drive them for a LONG time. Any of Thomas Stanley’s books (The Millionaire Next Door is a good read) cover this topic with the research to back it up.
Well, that about sums it up. Since about 20% of new car “sales” are leases, there is definitely a market out there for leasing vehicles. I think I’ll stick to buying my cars once someone else has been eaten alive by the depreciation and/or made lease (rent) payments and moved on to their next new ride.