I have a good friend who is on the verge of leasing a car. As 
giving unsolicited advice is a good way to lose friends, I hope they may read this. Car leasing has become incredibly popular in the past 15 years. Sellers hook you onto a monthly payment, while they keep the car as their asset. The leased car is never YOUR asset though unless 1] the lease period is up and 2] you choose the option to buy the car. A car payment that would normally be $399 a month may be $249 a month but leasing a car is ALWAYS a bad deal:
- If the vehicle is totaled in an accident, you are still responsible to pay back the full lease contract amount. All of it, even if the insurance company gives you back less than what you owe to the dealership. If you do go with a lease, expect to pay the additional fees for “gap” insurance which covers you for that difference between insurance reimbursement and the amount that you owe to the dealership.
- Many times, the lease agreement will be for 5 years/60,000 miles. So, if you go over that 60,000 and keep it until the 5 years is up, you’ll pay a penalty for every mile over 60,000 miles. Think about how many miles you put on a car each year. Most people use well over 12,000 per year. I bought my truck in April 2010, it’s now April 2011 and 33,000 miles later! At a conservative $0.15 per mile that’s 21,000 miles over the 12,000 mile standard allowance or $3,150 for this year’s excess mile charge!
- If you lose a job or experience a heavy time of financial hardship and cannot afford the payment anymore, the dealership will recover the car, sell it an auction, and if they sell it for less than you owe for the lease agreement, you will be legally responsible to pay the difference. Though this is also true for purchase contracts as well with a purchase contract you are usually not so “upside down” because of your down payment.
- The car is never yours until the lease period is up and you chose to buy the car. All the maintenance expense you incur is to maintain somebody else’s vehicle.
- The car cannot be counted as an asset on a net worth or credit calculation. It is still an asset of the dealership that leased it to you.
- Let’s look at the lifetime cost of lease versus a purchase. Say you buy a good used vehicle at $350 a month on a 48 month contract. Now assume the vehicle lasts you 10 years. Your cost is $16,800. Now multiply that by 3 for the 30 years you’ll probably regularly use a car, that’s $50,400. Now imagine if, instead, you decide to lease a car for the entire 30 years paying $350/mo at first you’d think the cost is just $126,000 (350x12x30) or a little over double that of purchasing – you’d be wrong. If you put $350 a month in a mutual fund that made 10% for 30 years you’d have $791,171 in 30 years. Subtracting the cost of purchase ($50,400) from the potential investment earnings ($791,171) is $740,771. Are you willing to pay 0.74 million dollars for the warm fuzzy feeling of always driving a new car? I’m not.
- If you decide to take the option to buy the car at the end of the lease term, you’ll have paid much more than the cost of the car even if you had financed it and the cost over a lifetime of driving is staggering.
Warren Buffet drives around a used pick-up truck during much of his personal time. He has lived in the same house that he bought about 30 years ago. Wealthy people know that possessions are a horrible investment that never buy the happiness they promise and spend accordingly.
