Let’s cut to the chase – I am NOT A FAN of leasing a car. Period. Ever. I really feel like I could stop here, but I won’t. I’ll show you the math on why leasing is not a good financial decision and, as a bonus, I’m also going to give my thoughts on buying a new car vs a used car.
Don’t worry, I’ll keep the math simple and I’ll even link a video to Khan Academy’s site where they provide a detailed explanation of the exact numbers I’m going to show here. Did you know that Khan Academy provides lots of great videos on financial topics to help create better money habits? They do.. You can find their website here. I just love Khan Academy, don’t you?! But, I digress. Back to the topic..
Article Table of Contents
Crunching the numbers
Refer to the spreadsheet below for the simple calculations used in this example.
Scenario 1 – Keep the car:
Let’s say you’re in the market for a new subcompact and the cost to purchase the vehicle will be $17,700. If you finance the car to purchase it, you will need to pay a deposit. Let’s assume $2,000. With a reasonable interest rate of 4.22%, monthly payments will be $465/mos for the 3 years until it’s paid off. Total cost to purchase and keep the vehicle is $18,740 (note that the difference between the purchase price of $17,700 and the $18,740 is interest you’re paying the bank).
Your other option in this scenario is to lease the car. As you can see, the monthly payments are a lot less over the 3 years but if you choose to buy the vehicle at the end of the lease term, you will pay a total of$19,924 and $1,184 MORE to own the same vehicle. I like to refer to it as the cost of lower monthly payments. Oh, and by the way, if you don’t have the cash to pay the Lease Buyout, you’ll need to finance it which means more interest and a greater difference in price that you’ll pay to lease vs. buying the car.
scenario 2 – sell/give up the car:
Refer to the spreadsheet below for the simple calculations used in this example.
I know what you’re thinking:”yeah, but Denise, I’m planning to give up the vehicle at the end of the lease. I’m sure that’ll be a better deal than buying the car, right?”
Sorry, but the math doesn’t support it. Even if you enjoy low monthly payments for 3 years while the purchaser endures high monthly payments, at the end of the lease term, you have nothing, while the purchaser actually owns the car. So, the purchaser can sell the car for the estimated sale price and still make out better by almost $1000!
The bottom line on Lease vs Buying
Leasing offers lower monthly payments and this is why they are so appealing. And, if you like to have a shiny new vehicle every few years, leasing allows you to easily upgrade to the newest model. But, financially, leasing is a bad deal for the consumer. I realize that car dealerships sell it as a great deal, but they’re out to make money. If it wasn’t a money maker for them, they wouldn’t be “selling it”.
What if you have a lease already?
If you currently lease your car, you are not in the minority here. Like I said, car dealerships hard sell leases and they are becoming more and more popular. I get that a low monthly payment and the idea of driving a shiny new car every few years is definitely appealing. It just doesn’t make sense financially.
So, if you currently lease your car, read your contract to see if you can get out of the lease early. Generally, there are stiff penalties for early lease termination. You may be better off waiting out the lease term and then choosing the lease buyout so you can purchase it.
If you have questions about crunching the numbers and whether early termination of the lease is a good idea, I’m happy to help you run the numbers.
Bottom line: I strongly discourage choosing a lease again, if you currently have one. Just buy a less expensive used car to get the lower monthly payments you need to manage your budget.
A Few Thoughts on Buying a New vs Used Vehicle
A car’s value depreciates approximately 20% the first year of ownership. So, why buy new? Dave Ramsey, a well known and reputable financial adviser says you shouldn’t be buying a new car unless you have a $1M net worth. I’m not sure where he came up with the number, but I like it as a rule of thumb. However, I really feel like buying used, even if it’s less than a year old, is always a #smartmoneyhabit. In addition to being a smart financial decision, it’s also good for the environment because you’re reusing. Bonus.
I’ll go a step farther on the car buying to say I strongly suggest you only buy what you can truly afford. Keeping up with the Joneses is a competition you’ll never win. Don’t give in. Don’t sacrifice what you want most for what you want now. Resist the impulse and get what you need AND what you can afford. All shiny new toys lose their luster.
~Financial Jackson
Questions? Comments? Please feel free to email me. I’d love to hear from you.