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I'm aware of the usual pitfalls of leasing a car (I found this question very helpful) and I know the general rule is that if you can't buy the car in cash, you can't afford it. However, I need a new car within the next several months.

I don't/won't have enough saved up to be able to pay cash for a better car than what I drive now, which is not technically mine (and so can't be used as a trade in). I will have enough for the signing fees for a lease (say $2000 due at signing, with a $200 monthly payment, and buyout of $18000 at the end of the lease period).

My question is this: If I already know that I intend to purchase the car at the end of the lease term, and the lease payment is low enough that I could pay it and save at least $100 extra every month to put towards the purchase of the car, is leasing still a bad idea?

If I have ~$4000 saved by the end of the lease term, then I should only need to finance ~$14000. $14000 in three years for a "used" car that I've had since it was brand new seems much more reasonable to me than $30000 for a brand new car now. I know I cannot afford the new car now, but I'm very sure that I'll be able to afford the "used" car in three years.

Does this plan seem like a reasonable way to proceed, or a big mistake?

  • Have you calculated the total cost of your plan (lease for 3 yrs then a loan for 14K)? Have you compared that to getting a loan with a monthly payment of $300? The second option would not enable you to get /as/ expensive of a car, but at least you could afford it. – VBCPP Apr 18 '16 at 15:28
  • @VBCPP "... but at least you could afford it." How do you figure that I can't afford what I'm suggesting? The extra $100 that I would put aside along with the lease payment is not the only money I would be saving-- its not like I would be pouring every dime I had into this car. – senschen Apr 18 '16 at 15:46
  • Why do you "need" a new car, rather than a used car that you could buy for whatever cash you have on hand? – jamesqf Apr 18 '16 at 16:56
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    Have you looked into buying a car that is a couple of years old, likely just came off of someone else's lease? If you are planning on buying that would get you past the biggest drop in depreciation and still keep you in a "newer" car. For instance we just picked up a '14 that is identical to the '16 they are selling new and saved basically half the price $15k vs $28k. At the end of the day a car is an emotional buying decision, you need to just reflect on what emotions are driving your choice, and work from there. – Ukko Apr 18 '16 at 18:14
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    @senschen We did what you are describing once and it worked out, but that was a special case. At the time Chrysler was having internal problems and they needed to move some minivans and we took advantage of them. Also do you have real lease/purchase rates to work from? If not go talk to the finance department and see what sort of rates they will give you personally with your credit and income. There is a bit of bait-and-switch in that a young person will not qualify for the advertised rate on either the loan or the lease. – Ukko Apr 18 '16 at 20:10
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You are still paying a heavy price for the 'instant gratification' of driving (renting) a brand-new car that you will not own at the end of the terms. It is not a good idea in your case, since this luxury expense sounds like a large amount of money for you.

Edited to better answer question

The most cost effective solution:

Purchase a $2000 car now. Place the $300/mo payment aside for 3 years. Then, go buy a similar car that is 3 years old. You will have almost $10k in cash and probably will need minimal, if any, financing. Same as this answer from Pete: https://money.stackexchange.com/a/63079/40014

Does this plan seem like a reasonable way to proceed, or a big mistake?

"Reasonable" is what you must decide. As the first paragraph states, you are paying a large expense to operate the vehicle. Whether you lease or buy, you are still paying this expense, especially from the depreciation on a new vehicle. It does not seem reasonable to pay for this luxury if the cost is significant to you. That said, it will probably not be a 'big mistake' that will destroy your finances, just not the best way to set yourself up for long-term success.

  • I appreciate your suggestion, but that does not address the fact that I need a car to drive in the intermediate 3 years. If I had the time to wait and save for that long I would, but I don't. – senschen Apr 18 '16 at 15:10
  • @senschen you are right, it does not address that, but I think the overall suggestion is correct. The problem is how much can you finance a car for, and/or are you willing to go with a used car that works for that time frame while you save money? – dakre18 Apr 18 '16 at 15:39
  • I should note, that when I say the overall suggestion, I am talking about jkuz's point about not leasing the car, and instead work at buying one instead. – dakre18 Apr 18 '16 at 15:41
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    Am I the only one who questions whether or not a $2k car is going to be able to provide reliable transportation for the next THREE YEARS? Unless you're already a car expert (and even then, I know mechanics who have had project cars that turned into money pits). It seems awfully risky to me - if you have 2k and spend 2k on a car that suddenly needs $700 worth of work on it, how do you get to work? – Rob P. Apr 19 '16 at 2:19
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    @jamesqf - That's simple. Don't spend 30k on a car if you only have 30k to spend. It's all a trade off, there is always risk and people manage their risk levels differently. If you don't have enough cash on hand to give yourself a buffer, it might make sense to look at an alternative (like leasing). With a lease, generally, you don't pay for repair costs. Of course, I'm also talking about total cost of ownership, not just a on-off repair. A 2k car might be cheaper, but cost more over 3 years than a 5k car. – Rob P. Apr 21 '16 at 1:39
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What does not seem reasonable about your plan is the payment and buyout. While $200/month payments are possible (but hard to find), buyouts are more typically in the five figure range.

Given that your savings and desired payment for a car is low (the average car payment today is about 450/month), can you really afford the massive depreciation of a late model vehicle?

Why not purchase a 2000 car now, and save the 200-300 per month? In about a year you could move up to a ~5000 car. You can buy a pretty nice car for 5K.

Myself, I am on my third year of driving a 4000 car.

  • Going on year 12 (or maybe 13?) of driving a $8500 car. And I wouldn't have spent that much if I hadn't wanted to play with a hybrid :-) – jamesqf Apr 19 '16 at 17:26
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I have a colleague who always leases cars first. He's very well off, has piles of money in savings, owns a home, and the cherry on top, he could just write a check for the car....

He sees the lease as an insurance policy on the first couple of years of the car's life. If it gets in an accident or he finds something about it he doesn't like, he can give it back to the dealer at the end of the term with no hassle and move on to the next car. Some people value the fact that a lease is a rental.

If you're leasing a luxury car or something you couldn't otherwise afford, no amount of mental gymnastics will turn this in to a good idea.

Separately, you should never make a down payment on a lease. If the car is totaled early on, you will not recoupe the money you put down. The issue here is that while the numbers all work out the same between a lease and a purchase your situation is different. If the leased car is totaled, the bank gets its money back from an insurer. If that payment doesn't cover the value of the car, the GAP insurance will cover it. In either situation, if there's an excess remaining it will be returned to you. The issue is the excess may not fully replace your down payment. If you then went to lease another car you would need to come up with that down payment again because you couldn't just simply choose to lease a used car; like you could in the case of a purchase. Additionally, GAP is generally included in a lease whether you want it or not. As far as I'm concerned it doesn't make financial sense to mitigate the value of the GAP coverage once you've decided to live in a lease situation.

  • You won't recoupe the money you put down, but you will owe less. You should make as large a down payment as you can because the less you borrow, the less interest you pay. Also, a larger downpayment reduces the cost of gap insurance, should you decide to purchase it. – David Schwartz Apr 18 '16 at 17:24
  • We're talking about a lease not a purchase. A large down payment on a purchase is different than a large down payment on a rental. Many lease agreements require GAP insurance. And the GAP insurance will make everyone whole, except you. – quid Apr 18 '16 at 17:36
  • I agree with everything you said in the comment above. Now, is there anything I said in the comment above yours that you disagree with? – David Schwartz Apr 18 '16 at 17:38
  • You should not "make as large a down payment as you can" on a lease. – quid Apr 18 '16 at 17:43
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    @quid Claimed lease rates are usually marketing ploys. I haven't seen a 0% lease that didn't have a "or pay cash and save thousands" alternative; the interest is hidden in the increased cost. – Yakk Apr 18 '16 at 21:03

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