When you purchase a vehicle, you basically have 3 options: finance, lease or pay with cash. I don’t know about you, but I don’t have the patience to save that much cash. Plus you’d get higher return on that money by investing it compared to financing interest rates. So realistically that leaves you with financing or leasing.
In my case I learned about both sides of the financing vs leasing debate from my family…
My Leasing Grandpa
My late grandpa leased cars pretty much his whole life. Every few years he’d have a brand new car which at the time I thought was pretty sweet. I guess since he was a driving instructor he felt obligated to always have a new car to use during lessons. That and his slow driving must’ve kept the cars in pretty good shape helping him avoid any extra trade-in charges. Tax benefits probably also played a role in his thinking.
In reality though this route ensured that he always had a monthly car payment. There was never a point when he could stop making payments and actually call the car his own. Basically he was just renting a car his whole life.
Normally people would have the option to pay to actually buy the car once the lease runs out. The problem with that is that there is always a high amount owing. Then you’re back to square one of needing a big chunk of cash or some kind of financing. Usually the monthly leasing payment is very close to what financing payments would be, but with leasing they don’t credit that full amount towards buying the car at the end.
When you trade the vehicle in you have to pay more if you rack up a lot of mileage too. Since the car is never truly yours, you are pretty restricted in what kind of changes you can make to the vehicle. Also you’d likely have to pay higher insurance rates while financing.
My Financing Mom
I remember my mom telling me to never lease a car, explaining how much more expensive it is without the vehicle ever becoming yours. Besides the cheap cars she bought early on, she would always finance her cars. She recognized the value in eventually owning the vehicle and not having payments. Her monthly payments were actually going towards a possession that she could one day sell and recoup some of the money.
If she wanted to, she could’ve saved up cash to get a new vehicle, but sometimes you have to replace your vehicle before you had planned. With her Honda Civic she happened to hit a moose and was suddenly forced to get a new car. She also had better uses for that cash such as purchasing a business and saving for retirement. I’m sure she got a better return on her money with that route.
With the financing route you get the freedom of the car actually becoming yours. There are no restrictions on how far you can drive each year. You are free to install a new stereo or alarm system. You could even paint in a different color or trick it out like an episode of Pimp My Ride.
Summary
So regardless of whether you want to drive a BMW, Suzuki Grand Vitara or Dodge Grand Caravan, it is almost always a bad idea to lease instead of financing. Unless you are getting tax benefits from running a business, you are likely getting a lousy deal. Instead of leasing, take the time to shop around for a good financing deal with a low rate.
I also will never lease a car (I think). At this point I try to purchase and own quality vehicles and then drive them forever. My Volvo is my biggest example. It is going strong now for 10 years, and I want to drive it another 5-10 years at least.
I’ve had my car for over 6 years and should be able to keep driving it for a while. Problem is that it might not be very practical if I started a family.
If you tend to get a new car every 5-10 years then leasing is a viable option. I don’t think many pf bloggers or readers do this though 😉
If you pick a reliable car with low maintenance costs then buying new is not a bad idea. Personally, I don’t like to go into debt for non-appreciating assets(I think it’s kind of a bad habit to get into: cars first, then vacations, etc). Even though auto loans are advertised at pretty low rates, I think most people end up getting higher rates.
Financing a used car would be even better though. Then you don’t have to absorb all that depreciation. You do have to consider your personal situation. You’re right that not everyone gets those super low rates.
I pay cash for the cars. But I have financed cars few times before for my businesses for the tax benefits at a zero interest rate. If I have to pay more than 3% interest, I would not finance a car.
That’s probably a good rule of thumb. Sure you’d have a good chance at earning more than that in investments, but it’s not guaranteed.
“I don’t know about you, but I don’t have the patience to save that much cash.”
If you have the patience for a payment, you have the patience to save the money. You just have to be willing to think a little differently and commit to driving a paid for car and pay yourself a car payment until you have enough for your next car. I’ve bought a Lexus and an Infiniti this way.
I guess I just haven’t been in a position to be able to wait to buy a car in cash. I’ve only owned 2 different cars. The first one I felt the need to finance because I had a very inconvenient commute to work and didn’t know enough about cars to get something cheap. With the 2nd car I had crashed my first car and suddenly needed a new vehicle. So waiting wasn’t really an option. Even if I could wait though, I’d rather put the money towards an investment.
Nice post and good info. We’ve never leased, but are now considering given some of the very reasonable deals out there. In our case it might be a good solution for the next couple of years with two in college and the “need” for an additional car aka our youngest bugging us for one of the family cars at school. I tend to agree with what you said and am at best lukewarm on the idea.
That’s an interesting situation to consider leasing a car. I guess it’s either that or help him a cheap car of his own.
Thank you, thank you, thank you!
I’ve felt for a long time that leasing was just ensuring a car payment, and I HATE car payments. It’s nice to see someone else have the same opinion.
I try not to finance, but it is unfortunately a must given my family finances. But I try not to buy too much car, and finance only a portion of the cost. My goal is to purchase my next car with 0 financing!
Scoring 0% financing would be pretty sweet, but it sounds like those offers are only available on specific new cars. You’d get a much better deal buying a slightly used car. At least I know you won’t make the mistake of leasing.
I always was in the boat of I’d never lease, but I gloriously paid off my 6 year loan (granted, 6 years ago I had only so-so credit so didn’t get the terms I’d get now, and wouldn’t finance out that long now). The very next month, my transmission went and I was just out of Warranty. Repair bill $5,000. Car’s worth, roughly $5,000.
So, I was stuck with decision to fix a car with over $100,000 miles on it, and surely more part failures/repairs to come. And still be driving a 6 year old car with high miles.
Or I could lease for 2 years for almost the same amount as the repair bill, with a lower payment and save for purchasing in 2 years. Or, I could buy a new or used car.
Well, I probably did what most of you would think is the smart move. My girlfriend wanted a new car, and was driving a 2009 Honda Accord with only 30K miles on it. I bought from her for $10,000, wrote up a contract with her, and am paying her $300/month until paid off, interest free.
But I’m a little jealous, because she just leased a 2013 Lexus CT 200h hybrid for $220/month and had to put very little down (about $1K) for 27 months.
I know my move was probably the smarter one, but still so tempting to know I could be driving a brand new car for less than I pay now, and a hybrid, loaded with features, etc. Then in 3 years I have to either continue driving an 8 year old model which may start having repair bills. I’ll have equity, but will have to deal with the dealers trying to steal my trade, or selling it privately which is a hassle, etc.
I still think buying Used is best with a great rate, but the new toy factor of leasing and lower payments are so tempting.
BUYING A CAR IS FINANCIAL RETARDED. Anyone who is apposed to leasing it’s because they just haven’t sat down and done the math. Unless you keep your car about 10 years, you are wasting money. people always say it’s just renting a car. Well I got news for you. Until you make your last payment you don’t own it. Average lean on a automobile is 96 months these days. That’s because people trade in their car before it’s paid off. So if that’s the case why would you want to spend $200,$300,$400 more a month to drive the exact same car? Either lease a new one or purchase a used one.
Example. Guy purchases a 2007 Mercedes GL550. Msrp $89,000. After tax and license about $97,000. After interest over a 72 months $108,000. Maintenance and tires ext an additional $6,000. So now he’s driving a 7 Year old antiquated car that he’s into for about $115,000. Divide that by 84 months which is how long he’s had it your looking at about $1,500 a month and it’s a old car now with almost 100k miles. Leased a 2014 for $1,100 a month and he gets a new car every 2 years, doesn’t have to worry about maintenance, depreciation, and accident killing the resale value. So he’s paying $400 a month less, driving the latest technology, with no worries about having to replace tires, belts, or anything. At the end of the day it always comes down to monthly payment because that’s what you pay. So why would you pay $400 more a month to drive the exact same car and also be responsible for up keep? News for you. Just because you purchased your car does not mean you own it. The bank does till you make the last payment. A car is a depreciating asset. When it comes to depreciating assets it’s wise to be the least invested as possible.
When you purchase a car you pay taxes on the entire car. So a $60,000 car your looking at an additional $6,000 and then paying interest on that 6k. When you lease you only pay taxes on your monthly payment. So say you buy a car on a 60month term and want to trade it in 3 years later. You just paid 100% of the sales tax when you could have only paid taxes on 38% of the cars cost. When you lease gap insurance is included. You don’t have to worry about depreciation because it’s already been set ( the residual ) When it comes to miles you can get how ever many you want. You can do a lease with 20,000 miles a year. Misconception of a lease. A lot of people don’t relies that every dollar of your monthly payment except tax and the small amount of interest called ( money factor ) (which is typically a lot less then any apr you can get) goes towards the balance of the loan. So before dismissing leasing do your research. Especially now days with the Internet and advertising the manufactures are very competitive. Unless you keep your car over 10 years if your not in a lease your wasting money. There is a reason why everyone that works in the automotive industry leases. It’s because we know what’s financially smart when it comes to acquiring a car. I guarantee you will not meet someone that has worked in the automotive industry for a while that purchased. They all lease because it’s by far the better route. OK. I hope you were able to take something away from this and make an educated decision next time you are in the market for a car.
The statement “BUYING A CAR IS FINANCIAL RETARDED” is a little extreme. I have purchased and still own two vehicles in my driving career. Still own the first with 290,000 miles and it has been paid off for about 16 years. It is still my daily driver to work. My second vehicle was financed at 0% interest and has been paid off for approx 9 years(has approx 30,000 miles on it). No car payments for 9 years! I can guarantee you that my net worth has benefited greatly from buying these two cars instead of leasing two cars for 20 years. It works both ways….and there are reasons to do both. If you driving the same vehicle for more than 5-6 years bothers you then by all means lease.
The reality is, as long as you need transportation, your car is a liability whether you have a monthly payment or not. I lease cars because I drive cars every day. I am okay having a low, monthly lease payment knowing that I will never get a rude surprise in an unexpected roadside break-down or expensive car repair bill. Aside from breaking, cars wear-out and need belts, hoses, brakes and tires. I know exactly what I’m getting each month with a lease.
You would be able to deduct from your self-employed income provided you were making justifiable trips with your vehicle. Meetings with advertisers, trips to and from office supply stores, computer store
visits, and the occasional business lunch. If you lived where I do, you would also be able to write
off a portion of your rent/utilities for home-office.