Why is leasing a car a bad idea?
If you are looking to build wealth, leasing is a bad idea. But so is buying a new car. All cars lose value once you buy them. New cars lose anywhere between 30-60% of their value in the first 4 years of ownership.
Buying a good quality, used car is the way to go if you are looking to build wealth. And keeping the car for a while is also desirable. Re-leasing every three years is no way to build wealth.
The American Car Payment is probably the biggest factor holding many people back from building wealth. Don't fall into the trap - buy a used car and drive it for as long as you can until the maintenance gets too pricey. Then upgrade to a better used car, etc.
If you cannot buy a car outright with cash, you cannot afford it. Period.
You SHOULDN'T lease one if you are going to get an economy car, if you don't drive too much (<15K / year), and you want to hang on to the car for a long time.
Otherwise, if you are a regular driver, driving a leased new quality car can be cost effective.
Many cars now have bumper-to-bumper warranties that last as long as the lease (say 80K). So there is rarely any extra costs apart from regular maintenance. The sweet spot for most new cars is in the 5th, 6th, or 7th years, after they are paid off. But at that point, you may find you have maintenance bills that are approaching an average of $200 - $300 per month. In which case, a lease starts to look pretty good.
I owned a 7 year old Honda Accord that cost only $80 less per month in maintenance than the new leased VW that replaced it.
Haven't looked back after that. Into my 3rd car and 9th year of leasing.
Here are the reasons I did not lease my current car.
When you lease, you're tied in at a monthly payment for 48 months or more. The only way to get out of that payment is to transfer the lease or buy out the lease. If you buy/finance, you can always sell the car or trade it in to get out of the payments. Or you can pay down more of the vehicle to lower the payments.
Most leases calculate the cost of leasing based on the 'residual value' of the vehicle. Often these values are far lower than the actual worth of the vehicle if you owned it for those months and sold it yourself. So when you do the math, the lease costs you more -especially with today's low financing rates.
Also consider how cars fare under your ownership:
Does your current car...
- Have flecks of yellow paint on the bumper from that tight corner of the parking garage?
- Have stains from baby vomit, pets, spilled coffee or oil marks from drive-in movie popcorn?
- Have Scratches and dents?
- Live outside, exposed to the elements?
- Frequently get parallel parked on the street overnight?
If any of the answers to these questions are "Yes", you're probably going to get hosed with fees when you return the car.
I have an eight year old Kia Spectra that my wife is after me to replace -- but it hadn't been giving me any trouble at all. Soon after she started telling me I should replace it soon it started having problems; compressor, tires, and so on. How did she know?
Anyway, so now I'm looking -- not ready to buy yet, but I'm looking. The reason I won't be leasing is mileage. I live 45 miles from where I work, so with incidental driving, I put at least 100 miles a day on a car. That's about 26,000 miles a year if I do nothing but drive back and forth to work.
On a monthly basis the lease is advertised as being less than most payments, but that is with a mileage limitation. Since most leases I've looked at top out the mileage well below that mark I won't be leasing.
I am looking at the new cars that are available now -- but I don't plan on buying until next year, and buying a lightly used car that is only a year to two old. So I'm looking at what I will be buying while I can still find information about them.
So yeah, mileage is a strong reason why I'm not considering leasing.
It's a very simple equation. If we forget about the stress and limitations that come with the so-called "lease", and make the following assumptions:
- if we lease, then we will return the car after 3 years to the dealer
- consider the worst case scenario mentioned above, that the car will lose 60% of its value in 4 years (I'll take 50% in 3 years)
- The lease is $300 a month while financing is $600 at a negligibly low rate (around 5%)
- the original car price was $28000
Then after 3 years of using this new car:
- For leased car, you have paid $10800 and ended up with nothing
- For financed, you have paid $21600, but own most of the car (financing average is period is 4 years), which can be sold for 50% of it's original price which is $14000, so the net loss is $21600-$14000=$7600 which is, with all the extreme assumptions we made for financing, would be so much less than the leased car!!!
I will never understand why people still "lease" a car. Even for very low income people who have to have a car, financing a per-owned decent car would do, but it's just "show off" seduction and lure that either unknowing minded or idiot teenagers fall for.