To Lease or Not to Lease?
Is it smarter to lease a car or buy it outright?
In the past, it was almost always cheaper to buy a car because of the high interest rates embedded within a lease.
But today things are changing because we’ve entered a new purchase environment. The average cost of a new car has bumped against a psychological ceiling and punctured it to reach historic highs. Shoppers are shocked when they look at the sticker price of a new vehicle, so leasing instead of buying is starting to seem like a better option.
Leasing a car has some obvious benefits. Let’s take a look.
1. Lower Monthly Payment
This is how a lease works. If you’re going to lease a car for three years, how much will the car be worth at the end of those three years? You take the car’s current value, subtract what it will be worth three years from now, and pay the difference. Let’s say the car declines $10,000. This means all you have to pay during your three-year lease is $10,000, broken into monthly payments. Sounds good, right?
At the end of three years, you can turn in the car and get a brand new one.
2. New and Cool Options
With a lease, you can get a new car every three years, which allows you to have better and newer options all the time: a great GPS, a backup camera, that thing where you swing your foot under the bumper and the trunk will open.
Driving a smoking cool car has some economic benefits. If you’re a salesperson or have an image your clientele are expecting, it makes sense to show up in a nice vehicle. Leasing a car can help you do that.
3. Tax Savings
When you purchase a car, you’re subject to sales tax. I live in California, where the average rate of sales tax is about 8 percent. That can be a hefty chunk of change, and when you lease, you don’t have to worry about paying it.
At the end of the lease, you basically get to drive the car to the dealership, drop off the keys, hold out your hand, and say, “Give me the next cool vehicle.”
Leasing a car is convenient. You don’t have to sell the old car or deal with trade-in problems. It’s super easy.
Those are the positives of leasing. Now let’s look at the negatives.
1. No Equity
Most of us think according to our income statements. “How much money am I making, and how much am I spending?” That is a valid question; however, the wealthy don’t think that way. They don’t ask, “How much can I afford to spend?” Instead, they think according to a balance sheet. They want to build equity, and there is no equity in a leased vehicle.
Leasing a car will lower your income statement outflow. You will pay less per month to lease that vehicle, but you will never own anything. You aren’t building financial “altitude.” You are just living according to your income statement.
The idea of balance sheet affluence versus income sheet affluence comes from Thomas Stanley, author of The Millionaire Mind. I heartily recommend this book if you want to discover how the wealthy think.
2. Paying the Dealership
When you lease a car, the dealership will tell you there’s no interest because it’s just a lease—something you’re renting. But the dealership is a business, not a friend; they want to make a profit off of you. Whatever you’re paying over a three-year lease, the dealership is bringing in enough money to make it worth their while. That’s called the time value of money or the imputed interest of leasing.
3. Keeping the Car in Great Condition
If you return your leased vehicle with damage or excessive miles (like more than 12,000 miles in a year), you can end up owing money at the end of your lease. The dealership wants the car returned in the same basic condition in which it left.
Leases are designed to benefit the lessor, not to benefit the lessee. If everything works well for you, at the end of your lease, you can drop the car off and you’re good to go.
But how many of us know that life is unpredictable? If the car is returned damaged or with high miles, you pay the difference. That’s the negative bite to protect the lessor. If you’re careful and return the vehicle with low miles and no damage, again that’s for the lessor’s benefit. Whether you use the car lightly or heavily, you are the one who ends up paying for it. You’re the one taking the risk in a lease, when it feels like you’re not taking the risk.
What Do You Think?
In summary, there’s nothing wrong with leasing a car. You might find it works well for you.
However, I have a bias because I want to be the bank. I want to build equity and pay myself interest, not a third party. At the end of the day, I much prefer to buy quality used cars that will retain their value over time.
If interested, you can find a free lease/buy calculator at www.bankrate.com/calculators/auto/lease-buy-car.aspx. No endorsement is intended by referring to this website.