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by Gary ForemanMany people are attracted to the lower monthly payments of an auto lease. But, even with the lower payments it's usually better to buy. There are a couple of reasons that's true:
- you don't build up equity in a leased auto.
- you'll be prone to trade cars more often
- you give up flexibility if you need to get rid of the car quickly.
The main reason why leasing isn't the best deal is that a car is a depreciating asset, and a car depreciates faster when it's newer. A $15,000 car will lose approximately 25% of it's value in the first year. From year two through year six the car will lose between 6 and 9% each year with the bigger losses in the earlier years.
Once you lease an auto you're much more likely to drive a new car every few years and the first miles are the most expensive that you can put on a car. Your cost of ownership drops dramatically if you keep a car 6 or 7 years.
For instance, if you drive 12,000 miles per year, the depreciation alone during the first year on a $15,000 car will cost you 31 cents per mile. By the time you get to the sixth year those miles only cost 7 cents each.
Clearly those first couple of years are very expensive ones.
Let's take a look at a fairly typical dealer ad. It offers a popular new model for $13,998 with 1.9% financing or a four year lease with $1,000 down and monthly payments of $249.
If you take the lease deal you'll pay a total of $12,952 over the 48 month period including his $1,000 down payment. So you've pretty much paid for the entire car. But, when the lease ends you won't own the car. You'll be required to turn it in. And, if you've put on more mileage than the lease allows or the car shows any unusual signs of wear, you will face extra charges.
Suppose you choose to buy the car instead. You'll spend $13,508 over a 48 month period (that assumes a $1,000 down payment and the 1.9% financing).
Your monthly payment would be $281. Not much more than the lease.
What if your credit isn't good enough to qualify for the 1.9% financing? Assuming that you pay today's average rate of 8.4%, that would bump the monthly payment to $319. That's $70 more each month than the lease, but you'd be building equity in the car.
The big advantage to buying comes at the end of the 4 years. You'll own the car outright. It will be worth approximately half of it's original $13,998 purchase price. So you'll end up with an asset of about $7,000 that you can continue to drive.
If you had leased there would be few choices. You could buy your old car from the leasing company. That would mean adding a couple more years of payments. You could be paying 6 or 7 years on the same $14,000 car! Or you could turn the car in and go find something else. Probably another lease. And you'd join the ranks of those who will always be driving new, but expensive cars.
You might be concerned with the reliability of a four year old car. Most cars can give more than four years of dependable service. But for example, let's say you buy an extended warrantee that would cover the car until it's six years old for an additional $850. Instead of signing a new lease at $250 per month, you'd be spending about $35 a month for the extended warrantee. In the fifth and six year you'll have saved $5,100 on lease fees plus you'll have your old car to use as a down payment for a newer car.
Besides the ownership issue, a lease could set you up for a nasty surprise. Sure, you expect to drive the car for four years. But everything doesn't always go according to plan. A lost job or sick child could make that car payment too big to handle. If you should need to get out of the deal early, it's harder to terminate a lease. Most carry a hefty penalty if you want to turn the car in early.
Some leases can be sold, but you would still be hurt financially. Selling any car in the first year or two is costly. Owning the car does give you more chances to get a better price.
OK, one final argument. What happens if you can only afford the $249 per month. Maybe $319 is too much for your budget. The correct answer still isn't to lease. It's to find a car that he can buy that fits within your budget. It might be smaller. Maybe used. But at the end of four years you'll own a car instead of walking away from the dealership empty handed.
~ Gary Foreman is a former purchasing manager who currently edits The Dollar Stretcher website