Is Leasing a Car a Terrible Idea?

Leasing a car can seem tempting You can drive a brand new car for a relatively low monthly payment But is leasing really a good idea financially? In most cases, the answer is no – leasing a car is a terrible idea for your wallet. Here’s why.

The Allure of Leasing

It’s easy to see the appeal of leasing. You get to drive a new, shiny car for a fraction of the monthly cost of buying. Leases typically run 2-3 years. At the end, you simply turn in the car and lease another new one. You’ll never have to drive an old, worn out car.

With a lease, you only pay for the vehicle’s depreciation during the lease term, plus some fees. This results in a much lower monthly payment than financing the full purchase price.

For example, you might lease a $30,000 car for $300 per month. Buying that same car could cost $500 per month after putting some money down. The lower payment seals the deal for many.

The True Cost of Leasing

While leases appear affordable the costs add up in the long run. Here are some of the reasons leasing is financially foolish

You Never Own the Car

With a traditional car loan, eventually you pay off the debt and own the vehicle. With a lease, you make payments for a few years and have nothing to show for it afterwards.

You continuously pay for a rapidly depreciating asset without ever building any equity. It’s like renting an apartment forever instead of buying a home.

Leased Cars Depreciate Fastest

New vehicles depreciate rapidly in the first few years. Then depreciation slows over time.

When you lease, you only use the car during its steepest depreciation period. Then you return it. The leasing company gets to sell it and pocket the remaining value.

Someone buying a 3-year old used car gets the benefit of slower depreciation after the initial drop. But as the lessee, you miss out on that equity.

Mileage Limits and Penalties

Most leases limit the number of miles you can drive, typically 10,000-15,000 per year. Exceed that, and you’ll pay stiff penalties of $0.15-$0.25 per extra mile.

It’s easy to underestimate your driving needs over 2-3 years. Going over your mileage allowance can ruin any illusion of “savings” from leasing.

Excess Wear and Tear

Leases allow for normal wear on the vehicle. But at turn-in time, the leasing company will scrutinize the car for any excess damage.

Even minor issues like small dents and scratches can result in hundreds or thousands of dollars in fees. And those fees often seem unfair or arbitrary.

Higher Insurance Costs

Insurance for leased cars often costs more per month compared to financing a purchase. That’s because the leasing company requires you to carry more coverage to protect their asset.

No Flexibility

With a purchased car, you can sell it or trade it in at any time. You’re also free to keep driving it as long as you like after paying it off.

But a lease locks you in for the full term. There are penalties for early termination. And you must return the car at lease end, even if you love driving it.

When Does Leasing Make Sense?

Leasing is rarely the most cost effective option. But there are a few situations where it could be worthwhile:

• You drive less than 10,000 miles per year and don’t anticipate needing more in the next 2-3 years.
• You want a luxury vehicle but can’t afford to buy one.
• You own a business and can deduct the lease payments.
• You truly don’t care about ownership and just want the cheapest way to always drive new cars.

Even then, carefully compare total costs to buying an inexpensive used car. For most people, buying beats leasing from a pure dollars and cents perspective.

Buying Is Better Long Term

While leasing appears affordable up front, buying and holding a car for the long haul is cheaper overall. Here’s why buying wins financially:

• Your monthly payments build equity that you keep after paying off the loan.
• You can drive the car indefinitely without a monthly payment after paying it off.
• Insurance costs tend to be lower for financed vehicles.
• No mileage limits or excess wear penalties.
• Used vehicles depreciate slower than new ones. You skip the steepest initial drop in value by buying used.
• The freedom to sell or trade in at any time.
• You can modify, customize or repair the car however you want.

Buying a used economy car with cash is ideal. But even financing a used car beats leasing when you run the numbers. After a few years of payments, you own a valuable asset.

With leasing, you merely rent the car during the period it loses value the fastest. At the end, you have nothing to show for all those payments.

Do the Math

To demonstrate the cost difference, let’s compare some examples:

Lease: $450/month with $2,000 down for a 36 month, 45,000 mile lease on a $40,000 luxury car.

• Total 3 year cost = $16,200
• At lease end, turn in the car with nothing to show for payments.

Buy: $400/month for 60 months to finance a 3 year old version of the same luxury car for $25,000.

• Total 5 year cost = $24,000
• After paying off loan, own a car worth approximately $15,000.

Buy Used: $250/month for 36 months to finance a 6 year old economy car for $10,000.

• Total 3 year cost = $9,000
• After paying off loan, own a car worth approximately $5,000.

As you can see, buying used is dramatically cheaper than leasing long term. Even buying new beats leasing once you factor in ownership and residual value.

The Psychological Appeal

Many people lease because they value always driving a new car, even if it’s not the smartest money move. Driving a luxury vehicle can provide an ego boost and image of success. Leasing enables having a nicer car than you can realistically afford to buy.

If you know leasing isn’t the best financial choice but do it anyway for emotional reasons, at least go in eyes wide open. Know exactly what it’s costing you rather than fooling yourself that you’re getting a good deal.

Other Things to Consider

If you decide leasing makes sense for your situation, here are some tips:

• Negotiate the best deal possible. Shop different dealerships and play them against each other.
• Put little or no money down to reduce risk.
• Buy “gap” insurance to protect against total loss or theft.
• Thoroughly inspect the car at lease end to avoid unfair wear and tear fees.
• Read the contract carefully to understand all terms, conditions and penalties.

Even if you lease, also consider these ways to save:

• Lease electric vehicles for the best value. Their residual values hold up better than gas cars.
• Lease lightly used cars coming off other leases rather than brand new.
• Look for lease deals on slow selling vehicles the automaker wants to move.
• Opt for longer lease terms (4-5 years) to lower your payment.
• negotiate higher mileage allowances if you’ll be driving more.

In Summary

For most people, leasing a car is a bad financial move that will cost you much more in the long run than buying. The lower monthly payments are an illusion that distract from the reality that leasing is essentially long term rental.

But perhaps just as importantly, leasing traps you in an endless cycle of payments while preventing you from building any equity. If having a nice car is important, you’re better off buying used and holding onto it for years after it’s paid off.

That said, cars aren’t purely financial assets. If you can truly afford the higher costs and understand the trade-offs, leasing can be a reasonable option to always drive new luxury vehicles.

Just be sure you’re eyes are wide open to what leasing really costs you over time. Carefully weigh whether it aligns with your transportation needs and financial priorities.