When it comes to financing cars, there are two kinds of people: Those who lease cars and those who have never tried it. I have leased over a dozen cars in the last 25 years and not once have I experienced any justification for some of the bad reputation car leasing receives from non-leasing car owners. Personally, I love to lease cars. However, it never fails; if I even bring car leasing up to a non-leasing car owner, he/she will usually scoff at the mere mention of the term and act as though I am infected with the flu or plague. Unarmed of any facts, experience or knowledge, these leasing skeptics will spread lies and misinformation to friends and relatives who are shopping for cars. Sadly, these people will take their advice and dismiss leasing as a bad car financing option before they’ve ever had a chance to learn about and consider it. I realize that leasing isn’t for everyone. There are certainly situations when it doesn’t make sense to lease cars, but there is a significant percentage of the car-buying population where car leasing is a viable and attractive option if they can get past some of the myths of the detractors, then educate themselves about how it really might make sense for them.
Car Leasing is Car Fleecing
“Yikes. Don’t lease a car, you’ll get fleeced!” I’ve heard the panic in the voices of many people who have never leased a car in their lives about how dangerous and risky it is to lease a car. There is one thing that distinguishes these car-leasing, horror-story mongers. They have never leased a car before. It only makes sense, that those who have never tried something are only going to know and remember the worst things they’ve ever been told about it. While my boss was visiting from out of town a couple of years ago and we were walking out to my car to drive to lunch, he commented on how new my car looked. When I informed him that it was actually three years old and I would be turning in the lease soon, he said, “Oh, you leased! Car Leasing is Car Fleecing” I asked him why he thought that, to which he had no answer. He had never leased a car before, and was just repeating what he had been told by other people who had never leased cars before. The reality of car leasing is simple, it’s a financing option, just as buying a car is a financing option. There is the possibility you can get fleeced whether you buy a new car or lease a new car. In fact, I would say the odds are slightly greater of getting fleeced if you buy a used car due to the uncertainty of the car’s condition and potential lack of warranty. When you lease a new car every 3-4 years with a warranty, you can be certain you won’t be paying expensive repair costs. Leasing is only fleecing if you make a bad deal. You have to watch out for the same thing when you buy a car, particularly a used one.
My Accountant Says Leasing is Bad
It amazes me how many of us take take our advice from those in the wrong occupation. While, being an account makes you good at counting money, it doesn’t make you an expert in financial advice or planning. On the other hand, there are a few things an accountant must know about car leasing: One, is that it does offer some tax benefits for business purposes. Two, a car is the most depreciating asset you will ever buy. The typical car loses 50% of its value in just 3 years; over 60% in 5 years. So, the $30,000 car you bought is worth only $12,000 in five years, which is typically the amount of time it took for you to pay off the loan, assuming you’re among the majority of Americans who cannot afford to pay cash for a new car.
When You Lease, You Don’t Own The Car
This is true, but the myth is that you would ever want to own a depreciating asset in the first place. This is not like buying a house, where you hope to get something for your money after a few years. Secondly, when you buy a car on a loan, who really owns the car for the first 5 years? The bank owns it, just as the bank owns it during the 3-4 years that you are leasing a car. Who really owns your house, after 10, 15 or 20 years, for that matter? By the time the typical, 5-year car loan is fully paid off, you now have an old car with no warranty and maintenance concerns. Any pride in owning a shiny, new car has faded with the paint, wear & tear and lost new-car smell. The satisfaction of owning a car that is five years old and worth 40% of what we paid for it isn’t so glamorous anymore. Those of us who lease cars experience the very same satisfaction of those who buy them. We keep them looking clean, detailed and sharp just as if we owned them. We treat them with care, park them in our garages at night and look forward to driving them the next morning.
Leasing Is More Expensive Long Term
This is only true if you compare leasing to buying a car, keeping it for greater than 5 years, and doing your own repairs and maintenance. Not everyone wishes to drive old cars. In fact, most of us who travel to and from our jobs every day, require a reliable form of transportation and do not have the time or expertise to work on them in our garages. One could technically make the argument that if you pay cash, upfront for a new car, you will save money after 5-7 years. In my opinion, paying a good sum of cash for a car is a big mistake, but that’s a topic I’ll cover soon in another column. The theory, anyway, assumes two things: One, that you don’t plan on replacing the car with something new, and Two, that you have the cash to put down on the car in the first place. Even, if you had the cash, the logic behind putting it all into a car is shaky at best. Doesn’t the money you spent on that car have to be recouped, somehow? There is a reason for interest on a loan. The cost of borrowing works both ways. When you lease a new car, every 2-4 years, you only pay for the portion of the car you use. Whatever money you had in the bank is still there, earning interest. Furthermore, if you leased your car for 36 months, you will likely not have to pay a dime for brakes, tires, alignments, leaks and other costly repairs. Oil changes and fuel are your only regular fees. When a cash-paying car buyer tells you that you will save money in the long run, remind them that the long run is a lifetime, and we rarely drive the same car for a lifetime. Cars generally don’t last as long as we do, which is why most of us buy or lease something new every 3-7 years.
Excessive Fees at the End of Lease
This is more of a lie than a myth. In the olden days, we had something called open-ended leases which resulted in some of the untrue horror stories you hear about today. Today’s leases are all closed-end leases, by law. Basically, this means, you will only be charged for unreasonable excess damage or extra mileage. Normally, you are allowed to have the typical-sized dings and dents, paint scratches, etc., that most cars have after a few years. Most car leases come with a 12,000 mile a year allowance. Anything over 12,000 miles, and you will be charged with a .10 to .25 per mile fee. Mileage is the first and foremost consideration in whether or not one should lease a car to begin with. If you are sure you will be driving more than 12,000 miles a year, then leasing is probably not for you. If your mileage is probably over 12,000, but less than 15,000, then ask about a 15,000 mile lease, which will mean slightly higher payments, but still could be worthwhile. The other consideration here is that just because you are leasing a car does not mean you cannot negotiate it’s trade in to a dealer. If you are over your mileage or concerned about excess damage, negotiate with a car dealer for something new and let them pay off the lease to the bank before the lease expires. The risk for damage, wear and tear is no greater with a car lease than with a car loan. It depreciates the car.
Car Leasing Complicates Things
Only if you fail to get the facts and figures before you negotiate. To be sure, there are some terms and jargon used in leasing that are not understood by many of us, such as Residual Values, Lease Factor, Capitol Reduction Cost, Lease Term, Pay Off, etc. While these terms are not difficult to understand, it is not really necessary either. The purpose of leasing a car is to preserve cash flow by acquiring a car for a low monthly payment and total cost. Your down payment, plus all of your monthly payments are equal to your total cost. What’s useful is to know how your total cost and monthly payments compare to what you would pay if you purchased the car. The goal in leasing should be to put little or no money down, and have a payment that is 25-35% lower than if you had purchased the car. Example: I recently leased a 2009 Subaru Legacy. The Retail Price of the Car was $23,000. I paid $500 down and leased it for 2 years for $231.00 a month. My total cost, including down payment and 24 monthly payments is $6,044. Now, let’s say I purchased the car on a 60 month loan at 3.9% (a very generous interest rate). Further, let’s assume the dealer gave me an extraordinary deal and sold it at $2,000 off the price. My price is $21,000 and I put 10% down. My monthly payment would be $349.00. After two years, my total cost is $10,367.00, including the down payment, and I still have 3 years to pay off the car. As you can see, the $231 per month, or $6,044 total cost is significantly lower than purchasing the car after two years. After 2 years, it’s a savings about 42%. That’s really all we need to know: Is it costing us significantly less (25-35%) to lease it then to buy it for two years? Of course, if we continue to make the payments on the car, we will own it after 5 years, and go on to save if we continue to drive it years after that, but that topic is addressed above. The point of leasing is to preserve cash flow, assuming we continue to drive new cars. Thus, a car lease payment should be at least 25-35% lower than a purchase payment. Of course, it also helps to know the lease jargon, and we have a page dedicated to explaining those terms, as well: Lease Jargon Understand, though, that leasing is based pretty much on the same things as buying. There is a retail price and a sales price. There is an interest rate and a term. The difference is that we only pay for the portion of the time we are driving the car – in my case with the legacy; two years, instead of five years.
Leasing isn’t for Everyone
This is not a myth, but the absolute truth. I realize that leasing is not in everybody’s best interest. If you drive over 15,000 miles a year, or simply love to own old cars and fix them up, leasing new cars every 2-4 years doesn’t make sense. On the other hand, if you enjoy and value new cars, drive within the recommended mileage, and do not have the time or wrenching skills to keep an old car maintained, don’t let the myths about leasing keep you from trying it. There is a prejudice against car leasing by those in our society who have never tried it. Don’t think you have to become an expert to make a good deal on a car lease. Our Monthly Car Lease Ratings and Car Leasing Terms Guide make it easy to compare car choices and insure that you are getting a reasonable deal for your money. I highly recommend using the LVR Formula as a way to benchmark the next car you are considering leasing.