Is leasing a car really all that bad?

[corn18]

I definitely think I need to lease a BMW i8 for my tractor business.

[MKKShah]

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.

The monthly payment when you buy a car with a 3 year loan vs a lease on the same car can sometimes be double or more. This can be huge. I was specifically thinking about a scenario where you intend to keep the car after the lease. You get financing for 2% for the lease, and then you should be able to get 3% or so for a car loan for purchasing at the end of the lease. In this case you keep monthly payments low, and have paid a "small" interest on the car.

[MKKShah]

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.

This is exactly what I was getting at.

[MKKShah]

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

I get the 10% part. Sounds reasonable enough. Not sure why you insist on a 3 year rule. A 3 year loan for 25K comes out to a lot and they may be able to afford (based on the 3 year rule) only a car that's worth half that amount. What wrong in this case in getting a longer term loan if you get a good interest rate, and drive a nicer car in the meantime?

Take my own case. I have a loan payment of $453/mo @ 3.24%. The interest part comes out to about $50 a month. Compared to having bought the car outright or paid down earlier, I am "wasting" 50/mo. in interest. But I could not have afforded this car at the time I bought it without the 6 year loan that I got it for.

Now, I spend at least an hour a day in my car. That's about 30 hours a month. I pay $50/mo i.e. $1.67 per hour of enjoyment of that car (compared to saving that money had I paid in cash). Why is this not considered "affordable"?

Here's one more thing to consider:. If you assume 3% inflation, in just one year, the interest rate (@ < 3%) is a wash because you are paying with cheaper dollars later. A dollar today will be worth only 80cents in 5 years, but you payment is still fixed.

So I still think neither leasing (with intent to buy at end of lease), nor having a 6-7 year car loan (at low interest rate) is a bad thing.

[Reggie]

It's just a little short-sighted. I would never pay $450 a month for an automobile. If you took that payment and invested it for 10 years, you would have $78,000. At the end of 10 years, your car is worth nothing.

But I'm 40 years old and my goals are to retire in a few years so far loans are not enticing to me at all.

What are your longer term goals?

[elessar78]

The monthly payment when you buy a car with a 3 year loan vs a lease on the same car can sometimes be double or more. This can be huge. I was specifically thinking about a scenario where you intend to keep the car after the lease. You get financing for 2% for the lease, and then you should be able to get 3% or so for a car loan for purchasing at the end of the lease. In this case you keep monthly payments low, and have paid a "small" interest on the car.

Please just show the math, apples to apples on the same year, make, model car. Cost of leasing + plus purchase at the end of the lease VS purchasing the car outright with a 60 month loan.

Which one will cost more in the end?

[Spiffster]

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.

The LEAF is a bad setup with no thermal management on the battery. Still, the level of battery degradation your brother is seeing... thats insane, and I would fight Nissan to honor their 10 year 100k warranty on that battery.
We have had the Volt for 3 years, and no noticeable range drop in battery mode. The RAV4 is almost three years old, same deal, we still get 100 miles/charge easy, just like new.

There is a Volt owner who made the news just recently where he has 200k on the odo with no noticeable range drop in battery mode.

Im not saying that there will be no drop in range over the life of the car, im sure there will be, but most stories you hear are the exceptions, not the norm.

We bought the RAV4 EV with the anticipation that we could hit 70% of original battery capacity at 100k miles. So, roughly 70/85 (regular charge/extended charge) miles range at that point. Thats conservative.

It really depends on your needs, and EVs certainly wont work for everyone. Thats not to say I dont think a lease is a good option by any means.

[disneysteve]

I was specifically thinking about a scenario where you intend to keep the car after the lease. You get financing for 2% for the lease, and then you should be able to get 3% or so for a car loan for purchasing at the end of the lease. In this case you keep monthly payments low, and have paid a "small" interest on the car.

I get the 10% part. Sounds reasonable enough. Not sure why you insist on a 3 year rule. A 3 year loan for 25K comes out to a lot and they may be able to afford (based on the 3 year rule) only a car that's worth half that amount. What wrong in this case in getting a longer term loan if you get a good interest rate, and drive a nicer car in the meantime?

Take my own case. I have a loan payment of $453/mo @ 3.24%. The interest part comes out to about $50 a month. Compared to having bought the car outright or paid down earlier, I am "wasting" 50/mo. in interest. But I could not have afforded this car at the time I bought it without the 6 year loan that I got it for.

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.

[dczech09]

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.

A lease, if stacked, will cost a lot more than a loan over the long-term. A lease traps you in a long-term payment merry-go-round, whereas the car loan deal would at least grant you the ability to own the car.

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.

With all of this being said, I am in favor of either paying a vehicle with cash, or (if you have to) by taking on a loan that can be paid off within 2 years. I am a little different than everyone else who says 3 years.

The reason why I am against leasing long-term, as well as holding car payments long-term, is because of opportunity cost. For some reason, everyone seems to forget about opportunity cost when considering the long-term costs of purchasing an automobile.

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.

[TF258]

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!

[jIM_Ohio]

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?

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

[disneysteve]

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

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.

[corn18]

Apple and oranges is correct. First figure out if you can afford a $40,000 car. If the answer is yes, then decide how to pay for it. Don't do it the other way around.

If you can afford it, now determine how to pay for it:

1. cash
2. loan
3. lease

If a loan is 0% APR and you can make the cash flow work, that is a good deal. If the lease is 2% and a good residual and the cash flow works, then that could be a good option as well. Cash is always good unless you want to make it work harder than the cost of the loan.

But you have to get past the first question before you get to the second. It seems as if you are tying to justify getting a $40,000 car when you should be getting a $20,000 car.

Tom

[jIM_Ohio]

Apple and oranges is correct. First figure out if you can afford a $40,000 car. If the answer is yes, then decide how to pay for it. Don't do it the other way around.

If you can afford it, now determine how to pay for it:

1. cash
2. loan
3. lease

If a loan is 0% APR and you can make the cash flow work, that is a good deal. If the lease is 2% and a good residual and the cash flow works, then that could be a good option as well. Cash is always good unless you want to make it work harder than the cost of the loan.

But you have to get past the first question before you get to the second. It seems as if you are tying to justify getting a $40,000 car when you should be getting a $20,000 car.

Tom

Until people look at the balance sheet side of the decision, it will be tough for them to see the problems with leasing.

Most people focus any large purchase on "can I afford the payment" not "can I afford the object".

[disneysteve]

Most people focus any large purchase on "can I afford the payment" not "can I afford the object".

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.