Maybe You Should Lease That Car After All…

by Miranda Marquit · 14 comments

The only thing that many personal finance writers hate more than buying a car with a loan? Leasing a car. However, there are times when it might make sense for you to lease. This is especially true if your alternative is to buy a car with a 72-month loan.

Swapalease performed a study to determine the financial sense of leasing versus getting a 72-month loan, and here’s what they found:

In what they called an apples-to-apples comparison, they looked at a $30,000 vehicle for which you put $1,000 down and paid 5% in interest and 6.5% in sales tax. They found that you could save $2,000 overall by getting two 36-month leases, rather than one 72-month car loan. And if you were to go through the process of four 18-month lease transfers, you could save as much as $5,000.

Could a Lease Be Better for Your Finances?

Of course, Swapalease has an interest in showing these numbers, since they specialize in lease transfers. That being said, a lease still might make more sense than a long-term loan (and in car terms, a six-year loan is kind of a long time).

With a 72-month loan, you’re paying a host of fees, from loan origination fees to interest charges. On top of that, if you have a small down payment (like the $1,000 assumed by this comparison), you’re going to pay even more money over the long haul.

Almost three years ago, I bought a brand-new car. Though I financed it for 60 months, I had a bigger down payment than $1,000 and a 1.9% interest rate. In my case, the numbers shake out a little differently — since I borrowed less, for a shorter term, at a lower rate. My numbers don’t show the same savings. Plus, I tend to drive my cars for eight to 10 years, so there’s no “need” to upgrade so often.

But I can see how some consumers might benefit from a lease program, especially if they have high turnover in cars financed for long periods of time.

What About Your Lifestyle?

I think one of the keys here is lifestyle and expectations for your cars. If you finance your cars for 60 or 72 months, but get a different car every three or four years, it doesn’t make much sense to buy. When you trade in your older car, you end up having to make arrangements to pay off the rest of your loan (usually through some sort of expensive dealer arrangement).

If you know you want to upgrade every couple of years, it probably makes more sense to lease a car than it does to finance one. That way, you don’t have any strings attached to the car, and you don’t have to worry about depreciation.

Alternatively, of course, you can always just buy your car with cash, paying in full and not borrowing or leasing.

Which method do you prefer? Paying in full, financing, or leasing?

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{ read the comments below or add one }

  • Chris says:

    72 month loan? What’s next, financing a car with a mortgage? Too funny.

  • dick says:

    I have to put on 250 miles a week to get to work and back home. That type of mileage works against a lease. I need at least 12,500 miles per year and would have nothing left over for recreational driving.

  • Chris @ CentsToMe says:

    Interesting, indeed. My theory has always been to purchase a used car at a cheaper price. No need to buy an expensive car to get from point A to B. Leasing could provide a cheaper solution!

  • Tim says:

    I’m a buy and hold guy. Average car lasts 14 years, 250,000+ miles. I can afford a lot of repairs for the price of one monthly payment. I change the oil regularly, have the hoses and belts changed every 90,000 miles and address any squeaks or rattles quickly.

    The only way a lease makes sense to me is if you can write it off as a business expense. Otherwise you are locked into payments for your life.

    While I haven’t done the math on buying new versus used, the one used car I bought was someone else’s problem. No point in buying trouble.

    I still think after two or three buy new and drive till they drop cycles, it is a lot cheaper than getting a used car at the latter half of the repair cycle. I call the repair cycle my history with new cars: I get 5-7 years of minimal maintenance (oil changes, one set of tires, wiper blades), 3-5 years of more intense maintenance (belt changes, hose replacements, water pumps and maybe fuel pumps, brakes and maybe some suspension stuff) and 2-4 years of fairly regular maintenance (things are wearing out at this point and as long as it doesn’t leave me sit on the side of the road, I can hit the mechanic pretty easily) instead of jumping in the last half of the cycle with a used car. Doing the math with one car a used is much better. But after the third used car to reach the same miles as my new and drive till dead car, the costs are pretty equal. The second time around the new car theory tends to be better and by the third time, it generally is a winner.

  • Adam says:

    The millionaires I’ve met don’t drive beaters. That’s an old line that was put forth as gospel by, “The Millionaire Nextdoor.” It references Sam Walton and Warren Buffet. I get it. However, in reality there are many millionaires who are driving leased cars. Why? Because they don’t care to deal with the maintenance, worrying about it breaking down, and like I said it’s actually cheaper in the long run.

    Owning a beater is fine (I’ve done that too!) but you’ll eventually pay for the brakes, wires, plugs, several sets of tires, transmission, starter etc. Your wife will worry about the car’s reliability. You’ll be worried to drive it across country etc. etc. It quickly becomes a limiting factor and something you have to worry about. Not to mention that even if you do the maintenance yourself there’s a considerable loss of your personal time to do so. This has its own intrinsic value and with cars you don’t get to decide when it breaks down. Often it’s at the worst time.

    Moreover, I have leased many cars and I’ve never had to pay any crazy charges to the dealerships when I turned them in. These are all fallacies put forth by people who’ve never actually leased cars. I have had many and it’s been a great experience — and one I highly recommend. You’d never convince me to pay $18,500 in cash for a car (don’t forget the $1200 tacked on as taxes also!) or get a stupid loan for $350-$400 a month. Both of those decisions are unwise.

    • Cyrus says:

      Well Adam, you obviously didn’t actually read The Millionaire Next Door, because the book is not about Sam Walton and Warren Buffet, but is an in-depth study of more than 1000 average millionaires who gained their wealth through financial intentionality and frugality. However, this is not the place to discuss that book in depth.

      You brought up the concept of a “beater” car. We’ve both driven beater cars and know that they are a hassle and are only a short term solution until we have the money for a more reliable car. However, there is a huge range of car quality and reliability between a “beater” and a brand-new car, and I’m not suggesting everyone drive beaters their whole lives. If I bought your Honda Accord after your 3-year lease is done, you’ve probably only put about 35k miles on it and would still be a very reliable car for many years. I would probably only pay $13,000 for it and be glad someone like you paid over $6000 in lease payments to cover the initial depreciation.

      I totally get the convenience factor of leasing cars, always having a new car every three years and never having to worry about any maintenance. I have no doubt your leases were great experiences as you say. However, convenience and having a great experience is different than frugality. I would love the convenience and experience of having a personal chef cook all my meals for me or eat at my favorite restaurants every day, but that’s not the frugal thing to do.

      The bottom line is, mathematically, leases are almost always more expensive and riskier than owning. After 10 years, you would have paid $20,400 in lease payments and have nothing to show for it at the end. Even if you buy the new car outright, which I agree with you is not generally a good idea, you pay $18,500 initially (I’m not including sales tax because most states charge sales tax on the lease payments too), and could sell it for 6 or 7k at the end or keep it even longer. Your total maintenance over those 10 years would have to be almost $900 a year average to break even, which is a lot, especially for a reliable car like a Honda. Furthermore, monthly payments introduce risk, even a small payment like $170 (please see my other comment above asking how you arrived at such a low amount). If you lose your job or have some other financial disaster, your lease payments could become a real strain on the monthly budget. If you own your car, you have little worries except covering any minor repairs that might come up.

  • Adam Bourque says:

    Great article and I would argue that leasing economical cars is actually smarter than buying a car outright. For instance, my lease is $170 a month….Do you really think you can buy any car out there and pay much less than that to drive it for 10-15 years? You’re kidding yourself. Not to mention that I’ll never had to pay anything for repairs or service on my lease. Nor will I ever be “upside down” or lose money on the deal.

    The only leases that don’t make sense for the long term are luxury vehicles and those that don’t get superb gas mileage. Otherwise you’d be hard pressed to explain to me how paying cash for an $18,500 Honda Accord or Subaru Impreza is going to be cheaper than paying $170 a month to lease it. For instance, after 10 years of leasing (getting a BRAND NEW car every 3 years roughly!) — I’d still only be out $12,840. Meanwhile, my $18,500 cash has been in the stock market and now has averaged an annual return of 9 percent compounded over 10 years. So explain to me how my way isn’t MUCH MUCH better than paying cash for a vehicle (buying a liability). Sometimes frugal people don’t really think through their arguments. I’m very frugal and my way is actually the frugal way. Your way is much too risky and involves a huge loss of capital up front.

    • Cyrus says:

      Hi Adam. I’m not sure if your comment was in response to mine above, but please note that I was not advocating buying a new car outright. I don’t think anyone should do this unless they have a lot of money and 20-30k is a drop in the bucket for them. I paid $7800 for my used Honda Fit over four years ago and plan on driving that for many more years to come!

      Leases are the most expensive way to own a vehicle, period. Car dealerships make most of their money on leases, and they are generally designed to make them money, not save the consumer money. Lease payments have the car depreciation and maintenance built in, plus a 5 or 6% annual finance charge at a minimum.

      Your number example of $12,840 vs. $18,500 for a Honda Accord leaves out several key factors. First off, $170/month for 10 years is $20,400, not $12,840, so I’m not sure where you got your number from. Secondly, the car you own is still worth something at the end of 10 years – the Accord in this example is probably still worth 6 or 7k. Lastly, because you never own a leased car, you are always worrying about keeping the mileage low and keeping the wear and tear minimal. Correct me if I’m wrong, but I think dealerships tack on huge fees at the end of a lease for going over on miles or for any damage.

      Like the article says, leasing is a lifestyle choice. If you like paying tons extra for the privilege of driving a shiny, new car every 3 years and then handing it back, then go for it. Keep in mind though that most millionaires drive used cars and have never leased a car. Something to think about.

    • Mike says:

      That’s nice, but given your numbers, $170 a month * 12 months per year * 10 years equals $20,400 total which is a bit more than the $12,840 you mention.

    • Cyrus says:

      Can you please provide more details about how you arrived at a $170/month lease payment for an $18,500 car? I tried using Edmunds Lease Calculator, http://www.edmunds.com/calculators/car-lease.html, and I had trouble getting below $250, even with very generous residual value and money factor numbers.

  • Cyrus says:

    It’s probably true that leases sometimes work out slightly better in terms of overall numbers than a loan. However, this article is glossing over the fact that neither one of these are smart financial decisions. Saying a lease is sometimes better for you than a loan is like saying eating McDonalds every week is sometimes healthier for you than eating Burger King every week. While it may be true under certain conditions, both will kill you eventually. Same with borrowing money for cars – it will slowly kill you, financially speaking.

    If you can’t pay for a car in cash, you can’t afford it! Cars are the often the largest assets we own that go down rapidly in value. Even if your vehicles are paid for, it can hinder your finances if too much of your yearly income or total net worth is tied up in things that decrease in value, so borrowing money for them compounds this depreciation problem.

    Most people drive fancy, shiny new cars their whole working lives but save little money for retirement. I know many have heard this before, but if you were to invest the average car payment ($471) every month for 40 years, you’d have between 3 and 5 million dollars. Borrowing money for cars, boats, trailers, etc. can literally cost you millions of dollars over a working lifetime. Find a modestly-priced used car that you can pay cash for, and put most of your money in things that go up in value, like mutual funds or real estate.

    • Demex says:

      According to the article he was able to get a car loan for 1.5%. Now, assuming you have a mortgage at 5% and even with the interest deduction you are still better off putting that money towards your mortgage and taking on the car loan at the lower rate. Even your mutual funds and real estate ideas probably will return a rate higher than 1.5% APY so you would be better off taking the loan and buying those instead. Debt isn’t bad as long as one knows how to manage it and keep themselves within their means.

      You mention buying used cars in a different post but I dislike that, I have had bad experiences buying used cars where they were nothing but money pits. I like the peace of mind that comes with a warranty and knowing I’m the only one to drive it so there aren’t any issues lurking inside the engine. Plus taking the car to the shop means I lose a day or two of work (or need to pay for a rental car which just adds to the costs). The extra money is worth the while in my opinion when it comes to a new car. I can understand if money is a bigger issue for you, though.

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