With the exception of a home, buying a car is probably the largest purchase most Americans will make. But there is another option instead of buying a car: leasing. What is leasing, and is it right for you?
When you lease a car, you are essentially renting it long-term, typically for about 3 years. There are good and bad things about that, but the primary thing to remember is that you don’t own it. You’re going to have to give it back to the dealer in an acceptable condition, at an agreed upon date.
Another way to look at leasing a car is as if you were buying it with borrowed money (a monthly payment), and selling it back to them for fixed price. That explains the most attractive feature of leasing: the lower monthly payment. Here’s why.
Why a Monthly Lease Payment is Less Than a Loan Payment
For the same exact car let’s say you have the option to lease it for 3 years, or buy it with a 3-year loan. With the lease, at the end of 3 years you have to give the car back to the dealer; you no longer have a car. On the other hand, when you pay off your car loan in 3 years you still have a car but no payments. See the difference? At the end of a loan you still have an asset; at the end of a lease, no asset. So of course it’s going to cost more for the situation where you end up with a car, an asset, that you can still use, drive, sell, or whatever you feel like.
The question you have to answer is: which is better for you?
The Pros of Leasing
Besides the lower monthly payment, what are some other benefits of leasing a car? I think the biggest benefit is that you’re not responsible for major maintenance. Transmission trouble? Not my car. Leaking head gasket? Not my car. Air bag recall? Not my car.
That’s your car, Mr. Dealer, and you need to fix it.
You might still be responsible for minor maintenance like oil changes and wiper blades – but you might not. All of those details will be in the lease agreement.
Another benefit of leasing is that you don’t have to worry about selling the car on your own. You’re turning it in to the dealer for an amount specified in the lease agreement: the ‘residual value’, what the car is worth at the end of the term.
If you’re the kind of person who needs – and can afford – to have the latest car with the newest gadgets then leasing car after car is easier than buying and selling your car every 3 years. But you’re paying for convenience.
The Pitfalls of Leasing
You still have to insure a leased car, just as if you’d bought it, so you’re not saving money there. In fact you might be required to have more insurance than you would have wanted if you bought the car. You also have less control over the vehicle. You may not be able to take it with you overseas if you get orders. Breaking a lease can turn out to be expensive. Moving to another state probably won’t be a problem, but it could increase your payment due to state taxes.
How much you drive the car is also limited. The lease agreement has a total cap on mileage that you can drive, and you’ll pay for every mile above the cap. Higher mileage caps are negotiable, but will add to your monthly payment and overall cost.
The worst thing about leasing a car, however, is that the payments never go away. At the end of the lease you have 3 choices: lease another car, buy another car, or go without a car. To lease again or buy means continued monthly payments. But the financially responsible goal should be no monthly payments. Pay off the car as soon as possible, get out of debt, and take control of your money rather than owing it to someone else.
“But everyone has a car payment. It’s just a part of life.”
Sorry, did you not get that?
You don’t always need to have a car payment. Just buy a car you can afford. What does that mean? Buy a car you can pay off in 3 or 4 years. Maybe that’s a smaller car, or a used car, or an ugly car. Whatever gets you to work or to the grocery store. Nothing in the United States Constitution says you have a right to the newest, fastest muscle car, the biggest, meanest truck, or roomiest, shiniest SUV. Don’t live beyond your means.
Just buy a car you can afford, pay off the loan, and … keep driving that car. Then you can take that monthly car payment and put it in a savings account. In a few years you’ll have a nice sum to use as a down payment for your next car. Or maybe even enough to buy your next car for cash without taking out a loan.
If you can’t tell, I’m pretty much against leasing a car, unless you’re a successful entrepreneur making money hand over fist, and a piddly little car payment for a Porsche or a BMW is the least of your worries. For most of the Sailors and Marines that I’ve met, however, a car payment (or two car payments!) is their second largest monthly expense after housing/rent. The best course of action for them is to minimize and eliminate their car payments.
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Rob Aeschbach is a retired Marine, a financial planner, and the owner of The Military Financial Planner LLC, a Virginia registered investment adviser based in Norfolk, Virginia. Rob provides objective, affordable financial advice for service members and their families, helping them make the most of their pay and benefits. You can contact Rob through his website MilitaryFinancialPlanner.com, or by emailing him at Rob@MilitaryFinancialPlanner.com.
