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.
No, a car is a depreciating liability. The only thing I will own is that that makes me money. A car nor a house will do such a thing unless you are using this car for Uber or renting out your property for a cash flow return. I have a 2002 dodge ram “asset” sitting in my driveway. I’ve spent several thousand on it this year and it’s still not running right. Ownership is not as sexy or attractive as your mommy and daddy once lead you to believe. The poor own. The rich control.
A car is a depreciating asset. Assets worth owning are ones that appreciate. What if you end up with a lemon, or a car you simply don’t like. Now as the owner you take the hit on it. Buying a used car makes sense. Leasing a new one has several merits. I think the assumption is that you’ll love and own your car for 10 years, and that your car will never have major mechanical issues. Today lots of cars are closed end leases where the value is pre-determined at the start, and several manufacturers offer free service plans for leases. Not to mention that many people can write off a lease for work. So a lease is not always a terrible option. I’d rather buy my house and lease my car. Most people rent homes and buy cars.
Hey Jam,
Sorry, in advance, for a lengthy response.
Why can’t I own both a house and a car (or two)?
Yes, a car is a depreciating asset. Yes, you should not expect to make money on a car over the time you own it. If you buy new every few years, you’ll get eaten alive by the depreciation. I never intend to purchase a new car and don’t recommend others to do so either.
Why? The math of leasing a vehicle simply doesn’t make sense in most cases. Car companies are not knowingly going to lose money just so they can lease a vehicle. They know the math and the math will statistically work out in their favor, either at the time of the lease agreement or when the car is sold after the lease term is over.
Your argument assumes you’ll come out ahead by renting a new car (which is all a lease is) because your expenses are known and you’ll be on a set timetable to replace the car every X years. But you’re always going to pay a premium for that. The upside to your approach is you’re always driving a relatively new car. The downside is you’re paying a lot to do so.
My advice has always been to buy a car at least 2-3 years old with the knowledge that you’ll always win or lose at the time of the buy. Some of the cars we’ve bought we’ve kept a couple of years and some much longer. In fact, I still have a 1997 Ford Ranger that I use around the farm because it has been a good truck. There is no need to replace it so I have no intention of doing so simply because it is an older vehicle.
All that said, if you didn’t lease, I wouldn’t have a nice gently-used car to buy when you were done with it! So I guess your approach and my approach work well together. If you’re more comfortable with a lease and you can afford to always pay a monthly payment for your vehicle, go for it. I haven’t paid a car payment in over 10 years and don’t intend to start anytime soon.
I’ve never considered a lease before, however I think I found a good deal. Let me explain. The Nissan Leaf is a $28,000 car but recently Nissan is offering a deal where for $2000 down and a monthly payment of $200/month 3 year lease. In addition to this the state of Georgia gives a $5000 Tax credit for EV cars whether they were leased or bought. Im thinking this may be a good deal. Basically you rent the car for 3 years for $4400 total after the tax credit.
I wouldnt want to own a EV. I tend to drive my cars for ~10 years. But $4400 is getting close to the 3 year maintenance cost of my current 12 year old car [which needs tires]. I have cash and I could buy a car outright but it seems like this would be a better deal. Any comment.
This is an interesting idea, Tommie. As far as leases go, this sounds like one of the best options I’ve read about. Georgia’s subsidy makes all the difference (of course) but on the surface this isn’t a terrible lease plan. However, I would still have some concerns:
1. Damage beyond what they would consider “normal wear and tear” during lease term – you pay for that when you turn the car back in.
2. Mileage – If you don’t drive much, this is no biggie. However, you pay a pretty hefty penalty if you turn in that car at the end of the lease with mileage higher than the allotted amount.
3. Maintenance requirements – It is different for every company, but often you must have the vehicle serviced exactly as the lease outlines, which usually means the dealer and a lot of cost that you may or may not have with a purchase.
There may be others, but those are my immediate concerns I’d want to look into before going any further. Maybe a smarter move would be to buy a $10,000 decent used car and drive it 5-6 years. At the end of that time, it is probably worth $4-5k (depending on too many factors to know today) and you’ve not had the concerns of “gotchas” with a lease. If you’re committed to trying out a lease deal, check out those three items and see if they’re reasonable. If so, Georgia’s tax credit makes the lease a lot easier pill to swallow.
I just wanted to let you know that I’ve recently discovered your blog and I LOVE IT! My husband and I are along way off from being debt free but your advice (such as never lease a car) is so simple yet really life changing for us. Thanks for taking the time to write and keep it up!
Wow, Becky! Thanks for letting us know. 🙂 And if we can be any help to you, please just let us know!
I am. For some reason, my posts keep ending up on the wrong line. LOL
I can understand that…since I do it all the time. lol
I agree with you 100%. We try to be good stewards of what God has given us and He has blessed us greatly in the 29 years of our marriage. Have never leased a car and don’t intend to. Very good advice.
I think that’s really what it is all about – being a good steward with what we do have. Great point, Linda! 🙂
I wasn’t talking about you and Barry.
Oh. BAHAHAHAHAHAHAHAHA!!!!!!!!!!!! Sorry, Tina! I’m a doofus.
WOW! Talk about rude.
Tina, we didn’t mean to come across as rude. We were simply stating why we don’t think having an auto lease is a good idea.
We’ve never considered leasing, but I had a single friend who loved leasing, and it was very good for her. I can see where it’s a good option in certain circumstances for some people.
🙂 We can agree to disagree. I (Stacy) just feel like there could be no better feeling than to know that I OWNED my car….not OWED someone else. 😉
You are really obnoxiously stubborn. If it’s cheaper to get a lease, how is it a worse option? This whole blog is supposedly about being financially smart, and yet, it boils down to you enjoying “owning” a car. Well, owning a car can be more expensive than leasing. So how then would it be a smarter choice? So stupid.
Jesus, when you can show me mathematically that leasing is a better option than owning (unless you’re one of those who believes it is necessary to purchase a new vehicle every couple of years), then I will give your comment more weight than the insulting remark based on ignorance of the math that it is. I’m ready to change my mind when you’re able to show me a concrete example that supports your claim.
My husband leased his last car before we were married, and his parents graciously paid for it for a year after he lost his job. I am not ok with this! Of course, the payment on a loan for a fancy car like he used to have would have been gigantic. But, between him, me, and his parents, we paid $15,000+ for that car, and 9 months ago we had to give it back. The plan before was to buy the car at the end of the lease, but that wasn’t possible in our situation.
My car wasn’t new, but my dad and I really looked around until we found a good one, it only had 25,000 miles on it, and it cost me $10,000. I paid it off in February. Granted, today it has about 115,000 miles, but it has never needed anything but tires, brakes, wipers, and oil (except when I got in a fender-bender). But, I OWN it. I paid for it for 4.5 years, and I OWN it. I just don’t understand leasing.
Jeanne, you’ve lived through why leases are bad…I think the people who believe in them have never had anything bad happen during the situation – but they’ve been VERY lucky.
The feeling of OWNING instead of OWING just cannot be beat. We own both of our old cars…and I wouldn’t trade mine for a brand new leased Mercedes any day. 😉
Thanks for sharing your story!!!
While leasing would not be something we’d do, I can see where it would be a good option for some people. My friend’s grandmother used to lease her cars. She always had a newer car (few repairs) and was able to just turn it in when she decided not to drive anymore, no hassle with selling or storing the car. Yes, she paid more, but it was worth it for her to have less issues. For someone like that, I think it was a good choice.
I am not eager to make anyone mad but it always, always fascinates me that some people are compelled to explain why, in the past, they have done the opposite of whatever advice is offered on whatever website. The psychology behind this is so interesting…are they looking for the writer to validate their decision? That would be an unlikely event! Is it a guilt thing? If so, you’d think they’d be unwilling to own up. Like I said…fascinating.
I’ve leased..it was dumb, I was young and my parents liked credit and didn’t help me make a better decision. I learned my lesson and bought my next car with a fat down payment and the next one (the cursed minivan…decimating the single iota of cool I had left) was owned free and clear from the beginning…used, of course. No payments = money for the other parts of your life!!! yay.
Chrissy, that’s a great accomplishment! You’ve proven the mantra of “you gotta have a car payment” wrong! 🙂
Barry and I choose to live by the Biblical admonishment not to go into debt – so we cannot say that leases are a good thing – it would go against everything we teach. 🙂 Fabulous comment, thank you very much!
I totally agree. I’d much rather pay cash and own my car outright than lease one.
Cash rocks. 🙂
My hubby & I went with a lease for our most recent car “purchase” (2 months ago). We cycle through cars pretty quickly (yes, I realize that isn’t financially the best option :P). We’d never done one before, and figured we may as well this time since in a few years we’ll probably just trade the car in anyway.
We looked at the residual price, and compared that with what similar cars were on the lot at the time of our lease agreement, and noticed that the residual price was better than (or the same as) what some of the cars on the lot then were priced at. We did opt to go with the higher mileage limit — 15,000/year. The overage is $0.20/mile. We have other cars, so if we get close to our limit, we can use a different car, without penalty, so we really don’t see ourselves going over the mileage limit. Granted, it would feel silly (er, stupid) to be making a car payment on a vehicle we won’t be using, but we know how many miles per week we’ll be putting on it, and 15,000/year will be plenty — we do plan ahead! 🙂
We leased this vehicle to get decent gas mileage, since our Trailblazer SS gets about 14mpg 🙂 We aren’t tempted to do any mods to it, because that’s what our Trailblazer SS is for 😉 We also sold a car just prior to leasing the vehicle we have now.
The dealership we leased from is actually a Christian-owned dealership, and some teachers from my old private, Christian school work there. The salesmen don’t work on commission, so it makes for an awesome, pressure free buying experience! They don’t hide anything, and it’s always an honest experience. We know we aren’t getting cheated when we deal with them. Between my parents, siblings, and now my husband & I, our family has purchased 13 cars from them! 🙂
My I know where you purchase your cars. Unfortunately this might sound really dumb but apparently my husband and I are leasing a car not in the process of paying a purchased car. My husband and I went to X dealership and let them know that we wanted to buy a car, they gave us an estimate and it sounded good so we signed the contract. 17 payments later I find that we were paying for a leased car. Obviously this is my fault for not reading the contract carefully but I thought for one I had made my self clear to them about purchasing a car, second it was the second car we were taking out and third I trusted them. 🙁
There is no specific place we purchase our vehicles, and haven’t been repeat customers at a single place of purchase. Obviously in this case you’ve learned your lesson to read ALL the contract before signing ANY of it. Many car dealers are weasels while others are completely honest. I’m not sure where you live but a yelp search or BBB review may be in order before you go shopping next time. I’m sorry this happened to you, but it is definitely a good lesson learned!
You got that right! Thanks for the reply. 🙂
You are absolutely right! About 10 years ago, my sister wanted a new car because all her friends were getting one. She went to X dealership(name left blank to protect the guilty)where she was convinced to lease a car at $350 per month for 48 months. Upon learning this, I went back to the dealership with her and told them (not very nicely)they needed to let her out of the lease agreement.
I then took her to the State Employees Credit Union where she was able to finance the same car for 36 months for a few bucks more per month. At the end of the term, she owned the car.
Thankfully, neither my sister nor I finance anything anymore and are very close to paying off our homes.
My husband and I have a “car fund” separate from our emergency fund. We have an agreed upon amount we will pay for our next vehicle when the 6 and 10 year cars we currently drive will not run anymore.
Life without payments is very liberating; everyone should try it!
WOOT!!! Close to paying off your home! YOU GO GIRL!
No objections from me-I am in absolute complete agreement with you from the beginning.
We like these kind of comments. LOL 🙂
I agree with you… *but* ~ Several years ago one of our daughters and her two little kids had to leave her husband. (Abuse.) After the dust settled, and she was living with us, she enrolled in college. The school was a 50 minute drive from our home, where she was staying at the time. She needed a reliable car. With two wee ones in daycare, and a significant commute, she had no time, money, or ability for down time. We went shopping. She really wanted a Honda, because as her oldest brother said, “At 100,000 miles, a Honda is just getting warmed up.” The prices on the used Hondas were outrageous. After careful consideration, she opted to lease one. In the following years, she remarried (to a very nice man) and eventually paid the overage on the miles and turned the car back in. For her, I think it was a wise choice.