Leasing a car is stupid....


#1

…and discuss.

http://www.owingmoneysucks.com/2012/10/25/why-leasing-a-car-is-stupid/

Firstly, this is not new information, but it is often ignored by people who disagree, for whatever reason that might be. Perhaps they failed math, or are just free spirits who value the “experience” more than a sound financial plan for their future.

Let’s look at this from a simple mathematical perspective. Cars, whether leased or not are expensive to own and operate. Often, the way you choose to purchase a car is going to determine how expensive it will be to operate. Leasing a car is the most expensive way to drive a vehicle, period.

How does a lease work, and why are the payments so low?

Let’s take a round number example and assume you’re about to BUY a new BMW with a manufacturer suggested retail price of $50,000 on a 5 year (60 month) loan at 3.29% (currently advertised on BMW’s site.) Your payments would be $904.89 per month. That’s a lot of money per month. So how can we make it more affordable? Let’s lease it, right? A low payment encourages you to compromise on your standard of living, often tempting you to lease a car that is worth far more than any car you would ever buy.

A lease payment is calculated based on the depreciation of the vehicle from the MSRP calculated at the time of the lease. So, in our example, if the new BMW is priced at $50,000 and the lease being offered is 36 months in length, the payment is based on the difference between the MSRP and what the manufacturer believes the car will be worth after 36 months (crystal ball anyone?)

Let’s say in 36 months, the value of the car is expected to be approximately $30,000 according to the manufacturer and the current MSRP is $50,000. The difference between the two is $20,000. So, what the dealer will do is offer the use of the car for 36 months by financing the depreciation. In this example, that rounds out to roughly $550.00/month ($20,000 ÷ 36). So you can lease and drive a new car instead of buying a new car and save yourself $350.00 in monthly payments ($904 purchase – $550 lease.) Great deal, right? Wrong.

What Happens at the End of the Lease?

Heh…this is the annoying part. You turn the car in and have nothing to drive. You just rented a car for 36 months with the full responsibility of maintenance (save for a few programs out there that include maintenance) and have nothing to show for it. $20,000 down the drain. Not only that, but if you’ve driven the car more than the lease allows for, or you damaged the vehicle in any way, the residual value will change and you’ll be the one paying the bill. You could get roped into buying the car for its current value, but that value was negotiated 36 months ago, and may not actually be what the car is worth. So, you could end up buying out the car at above market value.

Opportunity Cost

Those who lease are typically habitual leasers. They go throughout life with the justification that driving a new car every two or three years is worth $20,000 every time they experience it. If you’ve ever driven a new car before, you know that the experience of driving “new” ends very quickly. Paying for a vehicle’s depreciation over time isn’t a smart use of your entertainment budget.

Let’s assume that the above individual was able to purchase the very same car but 36 months later for it’s residual value of $30,000, cash, out the door. They then put $550.00 per month into a growth stock mutual fund for 36 months (a total of $19,800) and then leave it alone for 20 years AVERAGING 10% growth.

The result? $127,000. Let’s make that sweeter. Let’s say you continued putting $550.00 per month in the account for not just 36 months, but the entire 20 year term. Your total investment would be $550.00 * 240 which is $132,000, or in terms of habitual leasing, 6 new cars over an 18 year time-frame, and the balance on your account would have grown to $421,000.

      • Updated - - -

For more information visit: https://www.google.com/#q=why+do+leases+suck&safe=off


#2

Plenty of advantages and disadvantages to leasing. Same with renting vs. Owning a home. If you’re looking purely financial, leasing makes almost no sense and is not a great financial decision.

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#3

this all assumes that the reason somebody is leasing only because they want to live beyond their means. There are all kinds of business and tax situations that can make leases attractive. Also if you will always want a new car ever 2-3 years regardless a lease can work out if the terms are right.


#4

Also you may not have the cash to go and purchase a new car, but a lease you can toss down 2-3 grand and pay ~$200 a month. Also the car is under warranty for most likely the length of your lease.

I’m on my third lease mainly cause I didn’t have the money to purchase a car. My next car will probably be a used car to own.

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#5

I feel like if you have decent credit you don’t need money down to get approved, and if you purchase a car around 10-15k and get an extended warranty you can have $0 in your pocket walk in get a decent car, and have a payment around $200-$300 and get to own the car after.


#6

I know plenty of people who can budget around a $1-200 lease payment and dump that Korean POS ever 2-3years and get another one. Their only other option would be buy an older used car, and not be able to support emergency breakdowns or unplanned repairs expected with a used car. Leasing an expensive car is a good way to post up SIQ pixxxx on your local car site and look baller while going to school tho.


#7

If leasing is so bad, how come almost every professional in the industry does it? I’d say 9/10 people who work/manage in a car dealer, lease.

Would you pay $1600/mo for a $200,000 house if I told you, your house would be worth $100,000 in 5 years?
or
Would you rent the same house for $800/mo and you could walk away clean in 3 years?

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"What Happens at the End of the Lease?

Heh…this is the annoying part. You turn the car in and have nothing to drive. You just rented a car for 36 months with the full responsibility of maintenance (save for a few programs out there that include maintenance) and have nothing to show for it. $20,000 down the drain. Not only that, but if you’ve driven the car more than the lease allows for, or you damaged the vehicle in any way, the residual value will change and you’ll be the one paying the bill. You could get roped into buying the car for its current value, but that value was negotiated 36 months ago, and may not actually be what the car is worth. So, you could end up buying out the car at above market value."

This never happens. On a closed-end lease, you walk away. Most lease companies allow a decent amount of damage before they start charging you. What if you buy the car? Get into an accident? Your trade-in value just went down $5,000 on a $50,000 car. Congrats. On a lease? Who cares?

This guy is also talking about buying a $50,000 BMW. Most people aren’t leasing or buying a $50,000 BMW. 90% of leases are < $300/month on cars that average out to be $25,000. So in reality, most leases will cost you $3,000 a year. Which is a hell of a lot less than you will lose in depreciation.


#8

Leasing is a solid option for someone who has a dedicated budget to what they want to spend on a car per month. It is a good way to have something under warranty, zero maintenance for the most part and you get the newest latest greatest within your budget.


#9

Completely agree! Every situation is different.


#10

Leasing just to afford XYZ car is fucking stupid.

A lot of people don’t understand leasing and just see X payment and jump on board. I always loved the “I just got a lease but now I changed jobs and need to drive 20k a year”

The renting vs buying a home is way more complex than the lease vs buy option for a car. You can write off interest and generally homes become more valuable over time instead of being a bottomless pit like a car.


#11

If you want a perma-lease you are a financial nimrod.

You don’t have money to purchase a car because the car dealer has been taking your money and leaving you with little to show for it.

This is where it makes sense IMO. Business folks lease for the write off and because the luxury car they want would stick them with a nice amount of depreciation if they owned.


#12

Renting vs. Buying only makes sense in the pretense that the house you buy isn’t going to appreciate every year, but depreciate 20%/year like a car.


#13

so you’re telling me if you’re reasonably wealthy and know you will buy a new BMW 5 series every 3 years you’re an idiot to lease?


#14

The example in the original post is pretty much rule of thumb for anything. If I make 40k a year I’m not going to be in the market for a 300k house. …it’s fucking stupid.

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#15

Moron who wrote the article doesn’t take into account the fact that the government encourages some of us to lease by giving us tax breaks.


#16

Selective snipping at its worst there, did you not read the whole post?

“This is where it makes sense IMO. Business folks lease for the write off and because the luxury car they want would stick them with a nice amount of depreciation if they owned.”


#17

it’s not the selective… same would be true for somebody less well off who wants civic every 3.

Also when you buy you pay sales tax on the whole car, when you lease it’s only on portion of the car’s life you are using.


#18

Right but at least banks make solid attempts to stop this from happening when it comes to homes.

How many people on here drive cars they can’t afford? or rock some $700+ a month car payment while living in their parents basement?


#19

When you buy a car you pay sales tax once. When you perma-lease you’ll forever be paying taxes on the “portion of the car’s life you are using”. For every tit there is a tat. At the end of the day we all have to make our own financial decisions, I’m not proposing we outlaw leasing or anything. You really want to drag this out on my day off, don’t you? :wink:


#20

what are you doing on nyspeed on your day off… at least I’m getting paid to waste my time :slight_smile: