Is Leasing a Car Better than Buying?

Is Leasing A Car Better than Buying?

Most financial experts agree that leasing is a bad idea. They come to that conclusion for many reasons. You only have control of the car for about three years and then you have to buy a car or lease all over again. You never get a chance to build equity in the car so there is no value to trade-in or trade-up. You also own the car during the three years with the most depreciation – in the beginning. In essence you are simply renting the most expensive part of the life of a car.

Now, I wouldn’t say leasing is never a smarter choice. Since personal finance is personal, everyone’s situation is different. But one thing we can all agree on. Leasing is a very expensive way to drive a vehicle. I can’t say own, because you don’t really own it. The same as if you lease an apartment. You don’t really own it. You are using someone else’s property for a period of time. There may be a few situations where leasing makes sense. If you own a business for example, and the car is a business expense there could be some advantages to leasing because of our tax code. For an individual, if you absolutely must drive a new vehicle every three years because that is important to you, then leasing may actually be better than purchasing a new car every three years.

Of course, I would first want to understand the need for a new car every three years. That is simply a very expensive lifestyle, especially if you don’t have the cash to buy a car outright. I am saying that IF you must buy every three years, THEN leasing may be a cheaper alternative to an overly expensive lifestyle. I would first see if there was a way to change your outlook, such as buying a used vehicle every three years, or buying a new vehicle but hanging onto it for a while longer. Regardless, leasing is simply very expensive. Unfortunately, for the average consumer, the money they are losing because of the lease is money that should go towards other priorities such as paying off student loans, investing in retirement, saving for their child’s education, or saving for a down payment on a house. But its your money, just make sure you are spending it where it matters to you the most – while thinking about the long-term, not just the next three years.

If you are considering leasing, keep in mind there are lots of restrictions to leasing. The biggest is the mileage cap. One way dealers can get the monthly payment down is to restrict your mileage. If you drive 15,000 miles per year, then you are going to deal with a higher payment due to your mileage or you will end up getting hit with some large fees when you trade-in the car. You could end up arguing over what counts as normal wear and tear, especially if we are talking about something you did not do, such as a shopping cart bangs up against the car. Remember, the car dealers are trying to make money… that’s their job. They need to get you to focus on the monthly payment more than anything else, so they have more wiggle room in the contract to make a profit from you AND a profit when you trade in the car and they sell it. Plus, I don’t know if people who lease do nearly as good a job of negotiating as those who buy. Do not allow them to base your lease off the MSRP for example.

Think about it. Nobody pays MSRP when they buy a car, so we all know that it is a fake number designed by the marketing department. It is set so you can still overpay for a car and feel good about it. You have to negotiate many parts of a lease:

  • The purchase price (gross cap cost)
  • The cap cost reductions such as rebates, trade-in of your current car and any cash down
  • The trade-in price at the end of the lease (residual)
  • The interest rate (called the money factor, which you have to multiply by 2,400).

You should calculate the payment on your own to make sure you are paying what you agreed. There are so many moving parts in a lease that it is easy to get confused. And confused buyers rarely make good financial decisions.

If I cannot persuade to avoid leasing, then at least do so with as much knowledge as possible. If you are on the fence, then let me encourage you to consider purchasing a used vehicle and do what I have done. Wait for the other person to limp out of their lease contract and then you can purchase their nice gently used vehicle with low mileage. After all they weren’t allowed to drive it much and they had to turn it in with very little wear and damage to avoid paying penalties. Their expensive decision has now become your bargain.

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The three authors, Bill Pratt, Mark C. Weitzel, and Len Rhodes, are industry leaders in personal financial education. Together, they have a combined 75 years of experience in banking, economics, and entrepreneurship. Now, they teach thousands of students personal finance concepts and decision making skills, author textbooks and public press books on personal finance, and help schools develop innovative personal finance literacy programs. Recently, they were instrumental in developing a personal financial management certification program for leaders in higher education. The other books in The Money Professor series include The Graduate’s Guide to Life and Money and Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt & Ca$h. Their books, lectures, and programs give students, parents, and educators the tools and knowledge to make good financial decisions all their lives.