Buy or Lease?
Leasing can be one of the most costly ways of driving a car. Even thought the monthly payment may be lower than purchasing the car, leasing has hidden costs.
Making the wrong decision as to whether to buy or lease can cost you a substantial amount of money. Usually my rule of thumb is that leasing is only for business owners who can deduct the lease payments and buying the car is for consumers. There are, however, situations where leasing may work.
If you really must have a new car every 3 years, and you need an expensive car as a status symbol or to entertain as part of a job, then leasing may be the answer. Even then, there are pitfalls.
One problems with leases is that many consumers are totally confused as to what they are getting themselves into. This creates a situation where they can easily be taken advantage of by the salesperson.
Salespeople often make much more money on a lease than an actual sale. One trick they use to push you into leasing is to hit you with a ridiculously high payment quote on a purchase deal. When you are agonizing over how much it will cost you each month to buy the car, they offer you what looks like a low monthly lease payment. This is very misleading. In most cases, the total cost to lease a car is more than it would be to purchase it.
One reason leasing is popular is that it can allow someone to drive a car that they normally could not afford. Unfortunetly many drivers who lease will pay for it in the end. There is no question about it, leasing is expensive.
It can be extremely expensive if you don't know what you are doing. It's hard to imagine that human beings can be so extraordinarly cruel to one another, but salespeople will drive that shaft a deep as you allow them. It's not uncommon for a salesperson to base a leases payments on a price above sticker! In fact, the salesperson is expecting and counting on you to overpay.
Another difficulty in evaluating a lease is that the interest rate charged is often disguised as a money factor or decimal multiplier instead of a interest percentage rate. Before you lease you need to calculate the money factor into an interest rate.
When you lease, you never own the vehicle. That means at the end of the lease you have nothing. For some individuals, that's not a problem, they either stay on the leasing treadmill and lease another vehicle. Or they are able to dip into a savings plan and pull out enough for a down payment on a new car purchase. But what happens if you are unable to lease a vehicle because your job changes and your credit is not up to par, or you have no savings? Tough luck, you are without a car.
Owning a car can be a better financial alternative for most people. Remember, the first few years of a car's life have the highest rate of depreciation. When you lease a vehicle you are paying for that high rate of depreciation, plus finance charges and profit to the dealer and leasing company.
The only way to win financially when buying a new car, is to hold it for as long as possible. You really need to hold it for 5 years or longer to take avantage of the lower depreciation rates.
Another problem with leasing is that the mile allowance is only about 12,000 - 15,000 miles per year. If you drive more than that you will have to purchase miles at the time of the lease or pay more for them at the end of the lease.
The mileage penalties can exceed 25 cents per mile. In other words, if you drive an additional 10,000 miles during the course of the lease, you may have to pay a penalty that exceeds $2,500. If you drive a lot of miles, leasing has it's disadvantages.
Another concern when leasing a car is the charge for excess wear and tear. If you do not keep the car in great condition you will pay to have the car reconditioned. It can be quite costly.
Finally, if you need to get out of the lease before the lease term expires, forget about it. Early termination fees and penalties are due immediately -- and they are not cheap -- they can add up to thousands of dollars!
Leasing is best for business owners, or those individuals who drive less than 15,000 miles a year, who keep their vehicles in immaculate condition, who need a status symbol, and who need a new car every 2-3 years.
If you think leasing would work for you, you need to shop around and negotiate lease rates in the same way as you would loan rates. You also need to understand the details of the lease and negotiate every aspect. It is also smart to calculate the net cost of the leasing versus buying. This can often require the assistance of your accountant of financial advisor. Also follow the 10 WISE LEASE TIPS on this page.
One more word of caution, even if you own a business, you still need to perform a cost/benefit analysis as to whether you should buy or lease.
In the Financial Wisdom Seminar we teach you how to save money on all your purchases. Let us help you get wise.
Remember, my job is to help you become financially stable, secure and independent. I will do my best , you do your best.
Your author and friend,
Paul Barrett
