Dear Liz: You recently answered a question about whether to finance a car purchase. I bought a car in 1963 whose wheels couldn’t stay in alignment. By the time I had driven it 20,000 miles, I was on my third set of new tires. My next car had other repeated problems. Solution? Since then I have always leased and when the lease is up, I buy the car if it has been reliable. By then, the car is cheaper.
Answer: There are at least two ways to view your approach to cars. One is that you found an approach that suits you. The other is that you’ve been overpaying for vehicles for decades based on two long-ago experiences. Meanwhile, car reliability has steadily — and dramatically — improved.
Although there are exceptions, leasing is generally the most expensive way to pay for a car. And buying cars after the lease is over also can be problematic if the buyout price, which typically is set at the beginning of the lease, is higher than the vehicle’s market value.
On the surface, leasing can seem like a good deal. The car’s always under warranty and unlikely to need repairs. Lease payments are often lower than loan payments, since you’re not paying principal. That means you can drive a more expensive car than you could afford if you were paying cash or financing.
But that also means you don’t have any equity in the vehicle. Plus, leasing means you’re paying for cars during their first few years on the road, when they’re rapidly depreciating.
Sometimes manufacturers sweeten lease deals to make them less expensive than an equivalent loan, but usually you’ll pay a lot more over time leasing than you would buying.
The good thing about leasing is that you can take the money that you would have spent upfront on the buying a car and invest that sum in the market. Lease car now and invest the difference. If a car cost’s $35,000, and the monthly three year lease is $600 a month, no money down, that would cost $21,600 after the term of the leas is final. You would have saved $13,400. Think of the return on that $13,400 if grew even just 6%.
But obviously, stock market returns aren’t guaranteed, particularly in the short run.
I leased my first electric vehicle because of rapidly changing technology. When the lease was up the company offered me a buyout which I accepted. List price of the car was about $40,000 and after my lease payments and the buyout I had spent only $15,000 for the car. In this case leasing was a much better deal for a car that I eventually owned for 6 years. In general leasing for EV’s has been a good option because of the rapid pace of improvements in new models which causes people to trade in for newer models quicker than with gas cars. That being said…I purchased my most recent EV because I plan on owning it for many years and I did not want to be burdened by the annual mileage limit on most leases.
Yes! Electric vehicles are often the exception to the rule.
I am 88 years old but in excellent shape and my MDs say I should remain in good shape. I lease my Excellent but bottom of the line Hondas which I typically drive less than 10,000 miles for the contract period. I never worry about repairs, even oil changes are included. I currently pay slightly over $200 per month for my lease. This has been my practice since I was 75. Is the best approach for me?
Regards.
Great advice on leasing. Leasing can make sense when you know you want to change cars in a few years. For example, some people like to always be driving the latest model car and are willing to pay for it. Many women prefer newer cars so there is less likelihood of breaking down. Others just like to always have a car that is under warranty to reduce the risk of big unexpected repair bills. Of course, you pay for this.
With the lease you have the option to put the car back to the leasing company. It is like buying the car and negotiating the trade-in price at the same time. But you have to be really careful because a lot of lease deals are loaded with hidden fees.
I don’t think it’s fair to say you aren’t paying principle. A lease should simply be viewed as a way to pay P&I on part of the vehicle, and then have options at the end of the term. The difference between the capitalized cost (purchase price) and residual value is the principle you pay down over the lease term (in addition to the interest paid as “money factor”). I think it would also be beneficial to your readers to point out that the purchase price of a vehicle can be negotiated with a lease the same as it can with a traditional purchase. With this information in hand, a lease can be an extremely valuable tool to hedge against a dip in used car values and/or current technology becoming obsolete (certainly a potential issue with EVs as pointed out above, but at this point, a lot of other new cars have other experimental and rapidly advancing tech on board). What happens at the end of the term is the beauty of it all: If you’re happy with the vehicle, you can pay a lump sum or finance it for its pre-set residual value (almost like you’re buying a used car where you know its exact history). If its market value is higher than the residual, you can sell it or trade it in to take advantage of the equity (Note that some leases require turning in the vehicle at the end, but this is less common). But, if its worth less than the residual, the bank holding the lease is obligated to take it back and they will be the ones to take the financial loss on it. There are countless examples of this happening where the market softened on particular models and the banks took $10k+ losses on every lease return. In a time when vehicle technology is rapidly changing and advancing while the economy is experiencing unprecedented uncertainty, I believe that it would benefit everyone to learn how to compare a lease to a traditional purchase and be equipped to make a more educated decision about which is best.