Is leasing a car really all that bad?

[MKKShah]

Now let's say you want to buy a new car (leave out the New vs Used comparison for now. That is a separate discussion), is leasing that bad a deal? Why does practically everyone talk so badly about leasing?

Let's look at the numbers. Let's say I am looking at a brand new car that costs me $43,500. This car with $3000 down costs me about $435 /mo. incl. tax. (The money factor on the lease works out to about 0.9% APR). If I financed the same car on a 60 month loan I will be paying approximately 763/mo (I assuming 3K down for tax + dealer fees, 2.5% APR).

Now what's wrong with leasing in this particular instance?

- I have low monthly payments upfront.
- I am not paying a terribly high interest rate. In fact in most cases the money factor on a lease is better than the prevailing APR.
- At the end of the lease I have the option to walk away. (Typically when you buy, no matter what, the dealer trade in value after 3 years will be lower than the market price and you end up with a loss).
- At the end of the lease, I have to option to buy the car outright for a value that was determined at lease signing time. IF I have equity in it, I can choose to sell. If there is negative equity I can just walk away.
- In case of a lemon (well not technically the legal definition but let's just say a model year with too many recalls / troubles), again walking away is really easy.

One case I can think of where leasing may not work out is for high mileage drivers. But what if your typical driving needs are less than 10K miles, and you buy a lease with the intent of purchasing at the end? IS that really as bad as people make it out to be?

[disneysteve]

Leasing is virtually always the most expensive way to obtain a car. Esentially, you are going out and renting a car for 3 years. There's just no way that works out cheaper than buying.

1. You seem to be comparing a 3-year lease (I'm not sure because you didn't specify) with buying on a 5-year loan, so make sure you are comparing apples to apples.

2. At the end of your 3-year lease, you own nothing. You either have to then buy the car or return it and buy/lease another one, continuing to have a montly payment for another 3 years, then another, then another.

At the end of the 3-year loan (you should never take a longer loan), you own the car outright. It's yours. You can drive it until the wheels fall off or you can sell it whenever you choose. I had my last car for 14 years (and it was purchased used). So I paid my loan for 3 years (probably less in reality) and then I drove it payment-free for 11 more years. Compare that to the person who leased a car every 3 years during that period. Who spent more money in total over those 14 years?

It might be easy to spin the numbers to make the lease look cheaper but you're not looking at the big picture. If you only need a car for 3 years and then won't need one after that, just maybe the lease is the better option, but that isn't realistic for most of us. We need to continually own a car throughout our lives. It is far, far cheaper to buy one outright and replace it with another purchased car when necessary.

[greenskeeper]

But what if your typical driving needs are less than 10K miles, and you buy a lease with the intent of purchasing at the end? IS that really as bad as people make it out to be?

That's even worse than financing from the get-go and means REALLY can't afford that car.

Pay cash and drive until the wheels fall off....cheapest way to drive. Too bad that doesn't fit the mold of "I need a shiny car as a status symbol"

[ua_guy]

The lower monthly payment of a lease is what is so attractive, that, and being able to dump the car at the end of the lease and having no obligation to buy it.

But a lot of people don't consider the fact that they're locked into a contract for the lease term. Costs money to walk away if things change. That, and they are still bound by mileage constraints if things change--like the location of their job. Or, the fact that they usually end up financing the residual if they keep the car, so they end up paying the lease term (24, or 39 months, or whatever the term is) plus however long of a term to finance the residual (36, 48, 60 months...). How is paying money factor and interest over a period of 7 years "better" than knocking out a new car loan in 3 years? I don't think it is.

[elessar78]

Leasing is virtually always the most expensive way to obtain a car. Esentially, you are going out and renting a car for 3 years. There's just no way that works out cheaper than buying.

1. You seem to be comparing a 3-year lease (I'm not sure because you didn't specify) with buying on a 5-year loan, so make sure you are comparing apples to apples.

2. At the end of your 3-year lease, you own nothing. You either have to then buy the car or return it and buy/lease another one, continuing to have a montly payment for another 3 years, then another, then another.

At the end of the 3-year loan (you should never take a longer loan), you own the car outright. It's yours. You can drive it until the wheels fall off or you can sell it whenever you choose. I had my last car for 14 years (and it was purchased used). So I paid my loan for 3 years (probably less in reality) and then I drove it payment-free for 11 more years. Compare that to the person who leased a car every 3 years during that period. Who spent more money in total over those 14 years?

It might be easy to spin the numbers to make the lease look cheaper but you're not looking at the big picture. If you only need a car for 3 years and then won't need one after that, just maybe the lease is the better option, but that isn't realistic for most of us. We need to continually own a car throughout our lives. It is far, far cheaper to buy one outright and replace it with another purchased car when necessary.

Playing a sort-of devils advocate here... If you're going to drive the car until the wheels fall off, and your interest rate is low enough. Why not take a longer loan like 48-60 months?

Assuming a purchase price of $15,000 @ 3%, 60 months "only" costs you $500 more in interest payments. $8 more a month? 2 lattes?

Further, assuming you stick that difference in an investment with 6% return over the next five years, the return is $573. So the discussion is really over $73? A bit of a wash in my book.

I don't play finance for that long, but I have great credit so I get really low rates and toy with the idea.

[elessar78]

The lower monthly payment of a lease is what is so attractive, that, and being able to dump the car at the end of the lease and having no obligation to buy it.

But a lot of people don't consider the fact that they're locked into a contract for the lease term. Costs money to walk away if things change. That, and they are still bound by mileage constraints if things change--like the location of their job. Or, the fact that they usually end up financing the residual if they keep the car, so they end up paying the lease term (24, or 39 months, or whatever the term is) plus however long of a term to finance the residual (36, 48, 60 months...). How is paying money factor and interest over a period of 7 years "better" than knocking out a new car loan in 3 years? I don't think it is.

Leasers also do not consider the residual value. I have a high mileage minivan right now (a Honda). Good cars keep their value and it's a great plus when you go to trade it in or sell it.

[LivingAlmostLarge]

Leases are good for some situations and not others. Only individual circumstances can determine.

[disneysteve]

Leases are good for some situations and not others.

Can you give some situations where you feel a lease is the best option?

The only time that I think leasing "makes sense" is for someone who insists on driving a new car every 2-3 years regardless of the cost. It doesn't really makes sense to do that but if you are intent on doing it, leasing is probably the way to go.

[disneysteve]

Playing a sort-of devils advocate here... If you're going to drive the car until the wheels fall off, and your interest rate is low enough. Why not take a longer loan like 48-60 months?

As I've said before, the advice I give here is general, intended for the masses. Certainly, there are exceptions to the rules of thumb where doing something else can make sense and be appropriate. I've done plenty of things myself that I would never recommend to others because I knew my situation and I knew my level of responsibility and ability to manage what I was doing.

Does a longer car loan make sense? It might depending on the situation. The reason for the 3-year/10% rule that I frequent recite is to keep people from buying a car that they can't afford. Sure, you can stretch a car loan for 4 or 5 or even 6 or 7 years. If you determine what you can afford first using the 3-yer, 10% rule but then stretch those payments over a longer term, it will cost you more in interest but, as you illustrated, might not turn out to represent a big difference in actual numbers. The problem is when someone decides what they can afford to pay per month and then does so for the maximum number of months to get the most costly car they can. So maybe they can afford $300/month. On a 3-year loan, that's $10,800, but on a 7-year loan, that's $25,00. 25K buys a much nicer car than 11K.

Of course, there is also the option to pay a loan early. I bought my car in 2012. I think I had a 5-year loan but I paid it full in 14 months. We bought my wife's car in 2013 on a 6-year loan but we've made substantial extra payments and will have it paid back in under 3 years. I wasn't concerned about the term of the loan because I had no intent on taking that long to repay it. I was only concerned about getting the best interest rate.

[elessar78]

Gotcha. I always forget that the advice is generalized. A lot of people are afraid of the math—they shouldn't be esp. nowadays with online calculators for everything.

[Spiffster]

I would never lease myself, BUT, have you considered an EV lease or even purchase? THAT is the cheapest to own IMO.

Consider the fact that gasoline is so cheap (ATM) Thats putting a crunch on EV sales that you could definitely take advantage of. I have seen some lease deals on EVs that rival my monthly cell phone bill. There is also the 7500 tax credit and if you live in a state where there are additional tax benefits (like my state, CO) its a no brainer.

The only big gotcha to an EV would be the need to have a garage. Some may say battery life but thats a load of crap... they will typically last the life of the car.

The one to get IMO would be the Ford Focus EV.

I have a Volt myself, and my wife has the RAV4 EV... we love them. Both were 0% for five years and we picked them up for well below sticker.

[disneysteve]

I would never lease myself, BUT, have you considered an EV lease

I have a friend who recently leased an electric car. He and his wife are pretty well off and can afford to buy it outright. The reason he leased was because he feels it is new, relatively unproven technology and 3 years is a lifetime in that realm. He feels it is best to only commit for the lease term and then be able to walk away. So he didn't do it to save money or get lower payments or anything like that. It was more of a strategic move.

[bigdaddybus]

Leasers also do not consider the residual value. I have a high mileage minivan right now (a Honda). Good cars keep their value and it's a great plus when you go to trade it in or sell it.

I have to disagree with you here. Take German cars for instance, they historically have extremely attractive lease rates (Porsche, BMW, Mercedes) do in large part to their extremely high residual values after 24-36 months.

^^^That is one if the only examples where I think leasing makes sense. (that and EV's) Last year my local Porsche dealer was clearing out 2014 Porsche 911 S models for $5000 down, $1200 a month, 10,000 miles a year, for 39months on a car with an MSRP of $126,000. In retirement I would lease this car over buying over and over vs buying. In my experience, owning a German car out of warranty can be costly.

[ua_guy]

I have to disagree with you here. Take German cars for instance, they historically have extremely attractive lease rates (Porsche, BMW, Mercedes) do in large part to their extremely high residual values after 24-36 months.

^^^That is one if the only examples where I think leasing makes sense. (that and EV's) Last year my local Porsche dealer was clearing out 2014 Porsche 911 S models for $5000 down, $1200 a month, 10,000 miles a year, for 39months on a car with an MSRP of $126,000. In retirement I would lease this car over buying over and over vs buying. In my experience, owning a German car out of warranty can be costly.

Exactly. High residual values make for the best cheap leases, but probably the worst purchase options because such a high percentage of the car's value is still owed at the end of the lease. The attractiveness of leasing is being able to get more "car" per monthly payment dollar spent, in general. That's important to some people. Me, I'd rather have the title in hand to a car that I can pay off as soon as possible.

[LivingAlmostLarge]

EV for sure. I know an engineer for Nissan who told me (neighbor) do not buy the Leaf. Not for another 10 years. The battery life is crap and will crap out fast. Only lease these cars because by 5 years it's toast and not covered by warranty. Turns out he was right. My brother bought one and 3 years in they 60 miles a charge and not covered by warranty. Anyway EV are not something to buy right now.

Second lease people who own a business and can write off the depreciation of the lease. You can't do it on owning a car. Hence businesses often lease vehicles. Can make sense depending on your business.

Third not sure if you are going to be driving and would like the newest safety features. My BIL and DH are in the boat of who knows how long they will be driving. I will know for my DH in April. At that time we may sell his car and buy a lease. He may only have 3 years of daytime driving left or less and we will lease something with the safety features. Stuff like beeping over the line, rear view camera, etc. Anything to help his diminished capacity to drive and allow him to still drive. Can and will he? I have no idea, but we'll see.

Fourth leasing when you know you are in country for few year then returning to where you are from. Probably easiest.