Is leasing a car really all that bad?

[MKKShah]

If you intend to keep the car, you definitely shouldn't be thinking lease, you should be thinking purchase.

It isn't that I insist on a 3 year loan. It's that every financial expert and guru around does. Why? Because it keeps people from buying cars they can't afford. Using your logic, I could "afford" a Porsche 911 Carrera as long as I could finance it over 8 years, which I'm sure some lender somewhere would be more than happy to let me do.

If you couldn't have afforded your current car on a 3-year loan then you should have bought a cheaper car. That's the whole point. You shouldn't base your decision on your ability to make the payment. You should base it on the purchase price using that guideline. Car makers know buyers focus more on the monthly payment which is why they have started offering longer and longer car loans. 7-year loans are now commonplace and it wouldn't surprise me one bit to see them get even longer.

The 3 year loan rule may have been good some time back when even the best Auto Loan rates were north of 5%. Now, with good credit you can get around 3% for used cars for a 72 month loan, and less than 3% on new cars.

Newer cars (ones in the market say for the last 10-15 years) are generally well built, and last a decent amount of time. It is not unreasonable to expect a well maintained car to last 15 years or more and get close to 200K miles.

Inflation is hovering between 1.5-3% in the last 4 years. So you are still paying back with depreciated dollars, essentially bringing the effective interest rate to 1.5% or so. This is a steal in historical terms, and if I can drive a a car I want (say a luxury car or something I really think would matter to me), then this is a small price to pay.

So:
IF you get a good interest rate AND
IF you plan on keeping the car for a long time
THEN go for a longer loan term if it will make your monthly payments affordable.

Nothing wrong with it IMHO. I do understand other forum members have a differing POV.

[corn18]

The 3 year loan rule may have been good some time back when even the best Auto Loan rates were north of 5%. Now, with good credit you can get around 3% for used cars for a 72 month loan, and less than 3% on new cars.

Newer cars (ones in the market say for the last 10-15 years) are generally well built, and last a decent amount of time. It is not unreasonable to expect a well maintained car to last 15 years or more and get close to 200K miles.

Inflation is hovering between 1.5-3% in the last 4 years. So you are still paying back with depreciated dollars, essentially bringing the effective interest rate to 1.5% or so. This is a steal in historical terms, and if I can drive a a car I want (say a luxury car or something I really think would matter to me), then this is a small price to pay.

So:
IF you get a good interest rate AND
IF you plan on keeping the car for a long time
THEN go for a longer loan term if it will make your monthly payments affordable.

Nothing wrong with it IMHO. I do understand other forum members have a differing POV.

As long as you can honestly say "I can afford a $xx,000 car" before you acquire it, I am ok with you acquiring it by whatever financial means fits your situation the best. Methinks you are not addressing that question because the likely answer is you cannot afford the car you want. I could be wrong (and would actually love to be wrong in this case).

Tom

[MKKShah]

Let's say that I wanted to purchase an automobile and I was considering either a 6 year loan or lease. I could purchase a car on a 6 year loan for let's say $300 per month, or I could lease the car for 3 years at a rate of $200, then lease another car for 3 years at a rate of $200. (I am just spit-balling on the numbers).

Loan: $300 * 12 * 6 = $21,600
Lease: $200 * 12 * 6 = $14,400

After 6 years, the lease would indeed be the less expensive path. However, once the loan is paid off, I own that car and could drive it for another X years without payment. If I leased, I would have to take on yet another lease.

In the original post, I was specifically referring to the scenario where you will buy the car for at the end of the lease term. The purpose of the lease is to get you lower payments and give you the opportunity to walk away should something not be right, and still not pay any more than you would have had you financed the same car for a similar period of time.

I agree that a lifetime of leasing vs a lifetime of owning your own car for a long time, the latter comes out way ahead. But that is not the comparison we are making here.

If you want to lease to own, that will cost you more. Normally leases include "rental payments" because you are essentially renting the car and paying for the depreciation. Lease to own will basically include the entire value of vehicle in the payment calculations (or at least a large portion of the overall value).

Mathematically speaking, it is actually impossible for a lease deal to be less expensive than a loan deal (for the same value of automobile) in the long-run.

This is not true. Dealers often come up with very good lease deals / specials just to move the car. You may not be able to get the deal if you pay cash or finance to purchase the car. Plus you are guaranteed the residual value. If the residual value is more than the market price at lease end you come out ahead. If not, just go ahead about buy the same car used in the open market. Either way it's a win-win situation.

Of course, if you did not pay attention to the "Money factor" and got screwed on the lease deal to begin with then all bets are off. But this is not different from getting a poor interest rate.

The average car payment in America is $479 according to NADA. That amount poses a HUGE opportunity cost in terms of what it could become if someone invested that amount.

$479 may sound huge, but without the context income/assets or monthly cash flow, it is a meaningless number.

[MKKShah]

I recently leased a vehicle and ran the numbers both ways. Like someone mentioned it is easy to find calculators online for car loans and you take terms of the lease and can compare. In my situation the numbers came out almost exact either way. The lease is 540 a month for 39 months, first month was the down payment. To get 5 year loan on same car to 540 a month I would have had to put ~15k down. At the 39 month mark the buyout on the lease is ~15K more than what I would have owed on the loan, making it a wash. So I left my 15k invested and took the lease. If we want to keep the car after lease is up I will just pay cash and keep it. The big thing with leasing is the mileage limits they give you. We know we wont go over the limit. Just run the numbers of the terms both ways. I went with the lease, the wife is happy and if it doesn't work out its a lesson learned!

Brilliant! This is exactly the situation I was referring to in the OP.

It seems to me that leases (with the right money factor) can be attractive because:
- You are financing only the portion of the value of the car that depreciates during the term of the lease. It's like paying for 40% of a new car while still owning / using 100% of that car
- You then have a GUARANTEED purchase price for you car in the form of net residual value. You can then finance this amount if needed, or "Pay cash" if possible.

[MKKShah]

Get really clever. Buy a car in name of an LLC, then lease it to yourself in another LLC.

A lease is a better write off (or so I am told).


I think leasing makes sense for certain situations.

If you drive a lot for work, leasing is better- it gives you an efficient process for replacing car- just make sure the lease covers all the miles (if you drive 100k miles per year, get a 2 year, 200k mile lease).

If you own a business, I believe it is easier to lease the car than buy it for the business on the book keeping side. If a CPA could explain this, I'd like to double check this bit of info.

If you need a lower car payment, better to buy used than lease new

Good points here. But I was talking about purchasing a car for personal use. Plus I don't think most people would go through the hassles of starting multiple LLCs just for saving a few bucks on a car lease. And, unless you have a legitimate business use for the car, the tax deductions are questionable at best.

W.r.t buying used vs new, I am beginning to question the wisdom of used car on most new models. This is a subject for a different thread, and we should take it up there.

Similarly EV deals right now belong to a thread by itself. Thanks folks for bringing it up here, but I think we should take it up in another thread....It's a huge topic in itself.

Also, I am not sure I agree with the "if you drive a lot" theory. That's plain impractical for most new car leases. They generally limit to 10,000, and can reasonably go up to 12,000. If you anticipate driving more, straight up buying will be the better deal.

[disneysteve]

IF you get a good interest rate AND
IF you plan on keeping the car for a long time
THEN go for a longer loan term if it will make your monthly payments affordable.

I won't argue with this IF AND ONLY IF you could afford the same car with the 3-year/10% rule. If you buy a car you can afford and stretch out the payments to leverage the low interest rate (especially if it is 0%) that's fine. Just don't decide what you can afford per month and then buy the most expensive car you can with the longest loan you can get at that payment. That's doing the math backwards, which is what most people do.

[MKKShah]

Exactly. I think this is what people miss in the lease vs. buy debate. Sure it is cheaper to lease a $40,000 car but if your goal is a lower payment, don't get a $40,000 car.

TF258's example of $540/month for 39 months comes to $21,060 with nothing to show for it at the end of the lease term. Compare that to my current car. I bought it in 2012 for $16,000, paid it off in 14 months, and now I own it payment-free for as long as I care to keep it. I had my last car for 14 years (and bought it used).

I think when people compare leasing to buying, they simply aren't comparing apples to apples.

The issue in TF258's calculations is a new vs used question. Not a lease vs buy.

TF258 paid $21,060 towards the cost of a new car. The rest of the cost of that car can then be financed buy him when he decides to purchase the car at the end of the lease. So he got to use a "new car" for 3 years and has a guaranteed residual price for "that particular car", as opposed to any random used car.

You purchased a car for 14K and paid it off. A used car worth 14K is not the same as a new car worth 40K. We can argue about which one a person should opt for. That will be a used vs new debate. But in terms of lease vs buy (the same new car), it still seems to me that no one here has given a concinving argument of why buying is better. Paying cash may be be marginally (and we talking wafer thin margins) better, but if you take the investment returns / opportunity cost of that large upfront cash, lease to buy beats it hands down.

[MKKShah]

As long as you can honestly say "I can afford a $xx,000 car" before you acquire it, I am ok with you acquiring it by whatever financial means fits your situation the best. Methinks you are not addressing that question because the likely answer is you cannot afford the car you want. I could be wrong (and would actually love to be wrong in this case).

Tom

Sure. Agree on the affordability part. What in your opinion makes a car affordable to some one? Could you help out with some numbers sample income , debts, expenses?

This is an amazing discussion.

[MKKShah]

Right.

The problem with leasing in particular is that people don't think about the long term either. Yes, the payment on a 3-year lease is lower than on a 3-year loan but at the end of the 3-year loan, payments end. At the end of the lease, you need to start a new lease and 3 more years of payments, then 3 more, then 3 more after that. As I said, I had my last car for 14 years. I had 3 years of payments and 11 years without. I'm damn sure I spent less than anybody who leased car after car after car during those same 14 years.

I am with you here. I purchased my first car (and my second car) used. The first one is 15 years old, and I have had it for 11. It has 181K miles on it and I plan on keeping it until the wheels fall off. But lately it looks like given this approach a new car on a lease to buy approach doesn't feel all that bad to me.

[corn18]

Sure. Agree on the affordability part. What in your opinion makes a car affordable to some one? Could you help out with some numbers sample income , debts, expenses?

This is an amazing discussion.

I don't know the answer to that question. I guess there are probably rules of thumb floating on the inter web. Dave Ramsey says the total value of all your cars should not exceed 50% of your annual income. I guess if you own them, that might be ok, but I can't imagine having car loans out for 50% of my income (actually I can, because when I started here on SA, I had exactly that).

I have set my affordability level at $34,000 for now. I base that on nothing more than a wag. I have $20,000 in a new car fund. My least valuable car is worth $14,000 dealer trade in (very conservative estimate) and is 7 years old. So right now, I think I could afford a $34,000 car because that's how much I have. I also add $500 / month ($6,000 / year) to the car fund. I based that on my current cash flow and how much I could afford to put towards a new car fund. So maybe a year from now, what I can afford would be a $40,000 car. Or maybe I buy a $20,000 car and put the rest towards my daughter's weddings that I haven't saved up for yet.

I can tell you that before I came here, my view of what I could afford was based on monthly payments. Now it's based on the balance sheet. Depreciating assets suck wealth and should be abhorred not coveted. I'll leave you with a thought from Dave Ramsey that rings true in my mind: "Rich people don't put a large percentage of their lives in things that are going down in value. That's how they became rich." Also, read the book The Millionaire Next Door.

Tom

[greenskeeper]

$450/mo for 6 years on a car is insane. Of course I'm speaking from never EVER financed a car. In fact, the only thing I ever financed was my education and mortgage.

[corn18]

$450/mo for 6 years on a car is insane. Of course I'm speaking from never EVER financed a car. In fact, the only thing I ever financed was my education and mortgage.

That's just over $32,000 which isn't a lot for a new car. If it's @ 0% interest, you are making money. So how is that insane?

[disneysteve]

That's just over $32,000 which isn't a lot for a new car.

What constitutes "a lot" is all relative. Keep in mind that you earn tremendously more than most of us. So 32K might not be a lot to you, but it is to many of us. I've never spent nearly that much on a car, even a new one. My current car was bought used for exactly half that much.

[corn18]

What constitutes "a lot" is all relative. Keep in mind that you earn tremendously more than most of us. So 32K might not be a lot to you, but it is to many of us. I've never spent nearly that much on a car, even a new one. My current car was bought used for exactly half that much.

Had I wanted to reference a used car, I would have said that $32,000 is insane for a used car. The average sale price paid for a used car in 2012 was just over $15,617. But I didn't say used, I specifically and purposefully qualified my assertion with the word new. $32,000 for a new car is not only NOT insane, it is nearly the average price paid for a new car in 2014 ($31,252 to be exact). So, regardless of my income, the facts stand on their own merits.

[disneysteve]

$32,000 for a new car is not only NOT insane, it is nearly the average price paid for a new car in 2014 ($31,252 to be exact).

Well I don't think I'd call it insane, but it is an awful lot.

Averages can be deceiving. That 31K average includes folks who bought a Hyundai Accent, Toyota Yaris, or Ford Fiesta, all around 15K, but also includes folks who bought an Audi A5 (40K), BMW 5 (48K), Corvette (53K), Mercedes G (116K), or any number of other luxury vehicles. That skews the average upwards.

I don't think the average working person making the median household income s going out and spending 32K on a new car.

From The Motley Fool:

"Here's a surprising statistic: The average price of a new vehicle in the U.S. is $32,086.

Here's another one: The average U.S. household can't afford it."

From AutoBlog.com:

"Here's how much Interest.com says the average-earning car buyer can afford to spend on a new car in seven major metro areas:

- New York City: $21,907 affordable purchase price/$441 maximum monthly payment

- Los Angeles: $20,637 affordable purchase price/$416 maximum monthly payment

- Chicago: $21,409 affordable purchase price/$434 maximum monthly payment

- San Francisco: $28,009 affordable purchase price/$563 maximum monthly payment

- Boston: $26,669 affordable purchase price/$520 maximum monthly payment

- Houston: $20,271 affordable purchase price/$396 maximum monthly payment

- Atlanta: $20,000 affordable purchase price/$393 maximum monthly payment"