I’ve always considered leasing a car to be a bad idea, but I’m beginning to re-think that position.
I need to replace my 10-year-old car, soon. It’s well north of the 100,000 mile mark, it’s starting to burn oil, the transmission slips, and I’ve decided not to sink any more repair money into it. I’ll be doing at least 2 relatively long driving trips this summer so I need a car I can rely on.
The thing is, finances are a little tight these days. I have some cash available for a down-payment and decided on a monthly payment I can afford, and discovered that my numbers translate into some cheap-ass subcompact, or a 3-year old boring sedan with 20,000 on it, or some other such compromise. It’s not that I patently refuse to drive a 2007 Accord, for instance, it’s just that the prospect fills me with ‘meh’. You’re supposed to be excited about getting a new car, right?
I’ve also discovered that for a lower monthly payment than my max, and a much smaller down-payment, I can get a 3-year lease on a nice, brand-new model that I’ll really like. Of course I realize the downside – once the lease is up, I’ll essentially have nothing. But I also expect to be in a better financial situation by then, and if not, well, perhaps then I can settle for that used Accord.
So I’m fully aware of the financial aspects here, but this is in IMHO because I’d like to hear some Doper experiences. Have you ever leased a car and regretted it? Were glad you did it?
Usually, you have an option to buy the car after the lease ends. Anybody done that, and did it turn out to be a good deal?
I’ve never leased before but I’ve always heard the hardest part of the lease is staying under your allotted miles. You said you want to take a few long trips this summer and when they only give you 12,000 miles a year to use those long trips can really burn through the miles.
I’d recommend reading through leasing articles in the “tips & advice” section of edmunds.com.
Leasing is almost always a bad idea, and not just from the prospect that you’re essentially renting the thing for X years and at the end you have “nothing”. You could wind up worse - exceed the mileage permitted, or get in an accident, or step over some other line and you’ll wind up paying additional at the end of the lease.
Here’s another opinion:
Don’t live beyond your means. First and foremost a car is a TOOL for getting you from point A to point B. Yes, it’s nice if you can get excited about that, but it’s not necessary to the core function. What you need is a reliable car that fits your budget. So my recommendation to you is to buy that “boring” Accord, or, assuming it’s in good enough shape, a 3 year old sedan or whatever fits your budget right now. When your financial situation improves you can always trade that car in/sell it and upgrade to something you’re excited about AND have the satisfaction of knowing you’re self disciplined and fiscally responsible.
The way I see it, yes, you will probably be better off financially in 3 years but if you’re not you’ll still have an affordable car and not excessive debt from this. It’s a win-win. And like I said, if six months or a year down the road you’re situation improves earlier than expected you won’t need to get out of a lease, you can just upgrade as you want.
Leasing may be better than buying a new care – although I’m not sure that’s true – but both lose out to buying a recent-model previously-owned car with low mileage.
I’d look to places like CarMax or other reputable used-car sellers and get a car that’s 2-3 years old with low mileage that you can get excited about. A new car will lose a great deal of value in the first year; let someone else pay for that. I think I’m agreeing with Broomstick that the '07 Accord is the best option because it allows you the flexibilty to upgrade whenever you can afford it, and doesn’t carry the risks of a lease.
I lease one of my cars for the following reasons:
-I rarely keep any car longer than three years. Most are around the two year mark. I get bored very quickly.
-I have four cars, and split the miles among them. I have a 10K miles/year lease, and I am way under that.
-I have no desire to worry about maintenance, service or repair issues on this car. I have a project car for that. I just want it to work, and have someone else take care of the problems.
All that said, after getting bored of cars repeatedly over the last 15 years, I really love this one, and I think I’m going to buy out my lease.
ETA: The “interest rate” on the lease is actually lower than a loan would be, so it makes more sense to pay the lease payments, and invest the extra money elsewhere until it is time to buy.
Well, I disagree in my case - I buy my vehicles new, then drive them for 12-15 years and because I keep up with maintenance I don’t have a lot of trouble. Over that span of years, and buying carefully, I think I come out ahead.
But then, I am very much an atypical car owner.
Really, the individual needs to buy/lease/whatever according to their needs.
If you had leased the car from new, the at the end of the lease, you would have the option, but not the obligation, to pay for the remaining depreciation(aka buy the car out). If you choose to exercise the option, then you are no worse off than you would have been. However, as options always have a premium, you are now worse off than the person who has leased. You would also have not enjoyed the subvented lease incentives that car makers have been handing out coming up to the financial crisis, after which they either ate the loss, in the case of foreign car makers, or were made whole by the US tax payer in the case of GM and Chrysler.
She could have also bought a car that was 2-3 years old and maintained it well and kept it for 10-13 years instead and spent a whole heck of a lot less. You could get a warranty on a used car for a few years just like a warranty on a new car. There’s more chance the 2-3 year old car developed an unknown problem than a new car was manufactured with one, but sometimes new cars are lemons. All in all there’s a bit more risk with a 2-3 year old car but it’s pretty much dwarfed by the decrease in price.
A used car is cheaper than a new car? That’s impossible. I refuse to believe it. I suppose next you’ll be claiming that hamburger is cheaper than filet mignon?
On the other hand, putting 12,000+ miles on my vehicles a year for the past decade I suspect I would have been penalized for that in a lease arrangement. As it is, I negotiated a lower purchase price not only for putting a substantial amount of money down (thereby lowering the amount I needed as a loan, and the interest for same), I also purchased just past the year turnover so I got a new car from a “prior” year, which also knocked considerable off the price because the dealers wanted rid of them.
I paid $14,000 for my current car, brand new. Assuming I keep it 15 years, as planned, that’s less than $1000 per year over the car’s lifetime. Can you lease a car for less than $1,000/year? As my state taxes older cars less, that also saves me significant money after the first 5 years. With my vehicle being wholly owned I can insure it for just liability (yes, that is taking a risk - however, in 30 years of driving I have never been in an accident, so it has paid off over the years) whereas with a loan/lease car the actual owner dictates how much you must insure the vehicle.
My pickup truck cost $20,000 brand new - over 15 years, that’s still a low yearly cost for owning it. Could you lease a truck for that low a price?
Maybe I should throw in that my car gets 40 mpg - another cost savings right there.
I am not convinced that leasing would have been in any way advantageous to me, given my car ownership and use patterns.
Another advantage - as I own my vehicles free and clear, right now I pay for nothing other than insurance, gas, and the occasional oil change. Given my current financial situation - mostly underemployed - that is of enormous advantage in that I do NOT have to make a monthly payment or lose my car or truck to someone else!
(If I were fully employed I’d be stashing the equivalent of a car payment in the bank every month, so when I do need to replace or repair a vehicle I would be able to pay up front, with no loans involved)
Of course, that is what works for me - this is clearly an area where needs and opiions will vary.
Yes, this is true, but as I mentioned in a prior post I was able to purchase my vehicles at a “discount” due to timing my purchase. My husband and I could have purchased used, but we chose to buy new in much the same manner that someone else might purchase, say, a great GPS unit or sound system for their vehicle. It was an option we could afford.
If, Og forbid, we had to replace one of them now we’d wind up buying used as you mentioned for purely financial reasons.
Nothing you have stated here has any bearing whatsoever on your initial decision to purchase or lease the car. I’m afraid you don’t understand what a lease is at all.
When you take out a loan to buy a car, the bank gives you money, you give the money to the car dealer, you get the car, and if you don’t make your payments on time to the bank, the bank gets the car. Throughout your loan period, you pay back a mixture of interest and principle. The principle is equal to the price you paid for the car. I trust you are familiar with everything up to this point.
A lease contains all the aspects of a loan. The bank gives you money, you give the money to the car dealer, you get the car, interest is accruing on the loan. A lease agreement is an additional agreement you have with the bank, where for a fixed period (the lease period) you pay back interest on the loan, but only an amount of principal equal to the depreciation of the car’s value. The depreciation is pre-arranged by the leasing company and is supposed to represent the actual depreciation of the vehicle. At the end of the lease period, you have the option, but not the obligation, to either pay for the remainder of the depreciation, or to return the car to the leasing company and walk away.
If you choose to exercise your option, you are financially no worse off than had you taken out a simple loan and financed the vehicle from the beginning. Sure, you probably would have paid more in interest as an absolute figure, but only because you’ve been paying less principal throughout the lease period. You mentioned that you had offered a substantial down payment which reduced the amount of interest, well there is nothing stopping you from doing that on a lease.
At this point it is probably helpful to simply disregard the TMV aspect of this decision all together. You understand that money, either the banks money or your money, isn’t free. Whether you choose to pay more or less interest has no bearing on the buy vs lease decision - in either case you can pay more now and less later, or vice versa.
Going back to your decision to exercise the option or not. The main point is that you have an option, and any kind of option is worth an option premium. Maybe you don’t like the car? Maybe the car has developed some kind of mechanical problem during the lease period that bodes ill for the long term reliability of the car? A good example I like to give is the problem with 5 speed automatic transmissions in the 2000-2002 Honda Accord and Acura TL. A very large percentage of these experienced catastrophic transmission failures within 2-4 years. After a class action lawsuit Honda grudgingly extended the warranty on them, but many, many owners fell through the cracks and the resale value of these vehicles suffered accordingly. I certainly would advise anyone I know to avoid these cars like the plague. If you had purchased your car outright, you have no recourse. Obviously with a lease, you do. Having the option protects you from the risk of an unexpected decline in resale value.
The opposite scenario, where the resale value of your vehicle is higher than the residual value, is rare but sometimes happens. Particularly sought after models of sports cars that may have ceased production is one example. In this case, if you do wish to “mark to market”, you can simply sell the car, buy out the lease, and pocket the difference. This is the nature of the option, all the upside potential is yours, all the downside potential is the leasing company’s. This also applies to your concern about the mileage limitation. Obviously, the leasing company’s depreciation calculation needs to be done with the stipulation that the car is below a certain mileage, you can no more drive the car over the limit than you can set the car on fire. Again, the nature of the option is that at the end of the lease period, if you feel that the mileage charge is excessive, that is, the car at mileage x is worth more than the original price minus the depreciation you’ve paid plus the extra mileage charges, then you can sell the car at that value and pocket the difference. Mostly, I don’t think the extra mileage charges are far off the mark, but if you do, again, it’s an option, not an obligation.
One particularly spectacular example of when the car companies were massively wrong on their leasing bets was when fuel prices went up in 2008, depressing the residual values of SUVs. Here is one example.
The people who leased those BMW SUVs benefited from their foresight to the tune of hundreds of millions, at the expense of BMW. Those who prudently leased their Ford and GM SUVs through GMAC got a taxpayer funded bailout when GMAC converted to a bank holding company to access TARP funds, to the tune of tens of billions. People who buy their cars outright obviously get nothing. As I say, the vast majority of wealthy people lease their vehicles. Most people don’t become wealthy without understanding how these things work.
As an aside, your consumption choices are also quite bizarre. You are willing to go into debt to buy a new car, but insist on driving it for up to 15 years? If you are OK with driving a 15 year old car 15 years from now, why aren’t you willing to drive a 5 year old car right now? As has been pointed out, the actual depreciation curve of a car is not straight line, but rather, most of it happens in the first few years. Maybe it’s the immediate gratification of owning a new car. In any case, I don’t have any sort of mathematical argument against it, but considering modern cars are orders of magnitude safer, cleaner, more comfortable and fuel efficient than those of 15 years ago, I certainly would not do what you do.
There is an additional benefit in my particular part of the world. Here, when you lease a car, you only pay sales tax on the portion of the depreciation that you pay for during the lease, whereas if you purchase the car, you obviously pay tax on the whole lot. It doesn’t make any difference unless you return the car, but in the alternative situation where you purchased the car outright, you probably won’t recover the sales tax on resale of the car (no sales tax is charged on private used vehicle sales).
And you think this comes free? The leasing company can and will charge a higher interest rate to compensate for their risk. When I was car shopping 6 months ago there was a 2-4% difference in interest rate between financing and leasing over the same term.
Leasing gets you security, but you pay for it; and everyone has to look at their situation and crunch the numbers to see if the price is right.
I’m not saying leasing is always a bad idea, but saying that leasing is always better is clearly not true.
It’s as “free” as anything else you can get from a captive financing company. Car loan rates are not indexed to prime, they can be whatever the car company needs to move units off the lot. Automobile production has extremely high inventory costs and it is often better to sell a slow moving car at a discount than to keep it rusting away in the showroom. To give you a low interest rate, they have to make it up somewhere else, regardless of how you buy the car. Negotiate on price, not monthly payments.
In some states, you pay sales tax on the full value of the car at the beginning of the lease. But it gets better: you have pay sales tax again on the residual value if you choose to buy out the lease.
The difference between a lease and a purchase is that for the lease period you are essentially paying for the depreciation on the car. You’re also paying for it when you buy a car, of course.
The conventional wisdom that leasing is wrong because ‘at the end you have nothing’ is a fallacy. If the lease is accurately set so the residual at the end of it exactly matches the value of the vehicle at that point, then if you bought the vehicle and sold it after the same amount of time you’d have exactly the same amount of cash left - zero. Yes, you’d get money from the sale, but you also paid higher monthly payments. If the interest rates and residuals are set up perfectly, it’s a wash.
However, the finance company is taking on additional risk with the lease, because they’re responsible for selling the vehicle at the end. So they have to guess where the market will be two or three years down the road, and they have to hope that you’re not a worse-than-average risk for putting wear and damage on the vehicle. That cost is dumped back on you in the form of higher fees or interest rates.
But that still doesn’t make leasing a bad deal. Basically, what you’re doing is buying a car and also buying insurance that guarantees a resale value for that vehicle. That lowers your overall risk.
What can make it a worse deal than buying is that often the residual will be set at the wholesale auction price of the vehicle, because that’s what the car company will with it - send it out for auction. If you buy a vehicle and sell it at the end of the same period, you can probably get a higher price on the retail market.
Other than that, you just have to look at the specifics of the two deals. I took out a lease once because Ford had set the residual value on the minivan I wanted ridiculously high, so they could offer cheap lease rates during the last economic downturn. I jumped on it, and two years later when I turned the vehicle in equivalent models were going for about $2,000 to $3,000 less than the residual on my vehicle. That was basically money in my pocket.
But the most expensive part of a lease is simply that it locks you into a pattern of always driving vehicles during their periods of highest depreciation. That makes leases a luxury item, and a pretty expensive one at that. The cheapest way to own a vehicle is to buy it when it’s a year or two old and still under warranty, then drive it until it falls apart. Do all your service intervals, and don’t beat the vehicle up, and it could last you 15 years and be reliable the whole time. Now consider leasing every three years - you’d go through five vehicles during that same period, and your total cost of vehicle ownership would have been much higher.
