I’m not kidding- you can save hundreds of thousands of dollars by not leasing a car. The really great news is, it’s not difficult to do, AND you can actually wind up driving the same car you would have been leasing, for thousands less. Let me explain.
People generally lease cars to save money, and often use a lease to get into a car that they feel that they can’t afford any other way. Some lease cars because it’s less expensive than buying if you change cars frequently (this is actually TRUE). Leasing is structured to appear to be less expensive than owning, and for good reason- the auto industry makes a killing on leases. But you’re the one who usually ends up worse off in the end. When you enter a lease, you effectively agree to rent the car for a pre-set period of time. You pay a bunch of initiation fees, monthly payments for every month you drive it, and then usually more fees. And God forbid you have to break that lease due to a change in job, income, or life situation- it costs thousands (and will wreck your credit). At the end of this transaction, you don’t have an asset that you can sell, almost guaranteeing that you’ll enter into another lease. Once you get into the first one, it is difficult to exit the cycle down the road. The thing that is confusing about auto leases is that they SEEM so economical, but in most cases they leave the consumer in worse financial position than if they had purchased a similar vehicle. Let’s look at an example:
Let’s say I wanted to drive a Jaguar F-Pace. According to Jaguar’s website, if I want to buy this car with a turbocharged engine and the premium package, and had $4000 (or a trade worth that amount) to put toward either a down payment or origination fees, I would be buying the car for just under $48K and spending $1202/month for 36 months. Pretty steep! I’m really not interested in a car payment that is more than my mortgage! However, I could lease this vehicle with all of the same criteria for the low payment of $429 for 36 months. That seems better, right?
It’s not better. It may SEEM better if you evaluate the monthly payment and stop there, instead of figuring out what is better financially for YOU, and that’s why this can be confusing. Here is where you end up at the end of 36 months: with the lease, you spent over $15K on payments, and you don’t own the car. You turn the car in, pay fees for over mileage ($0.15 for each mile over 30000) and other penalties, and that’s the end of it. Now, let’s see what happens if you had actually purchased that same vehicle: at the end of 36 months, you would have spent $43K on payments- considerably more. BUT- you own a vehicle worth $28K. So- your total spend is actually…$15K or so- roughly the same as the lease. If you are planning to get into a brand new car every three years, leasing is slightly more economical, due to the savings on sales tax and interest. Fortunately, however, buying or leasing over a three year period is not your only option. If you buy new cars every three years, you’re going to spend way too much of your hard-earned money on cars.
What is the “other” better option? Well, let’s say that instead of trading that car in at the end of your loan term, you keep it for another 3 years after- 6 years total (which, by the way, is the magic number I aim for with all of my vehicles- see my post on buying cars here). If the car is still in good working order, by all means, keep it longer! You now have ZERO payments (imagine how much of that you can save!), and even at the end of that period, you’ll own an asset worth roughly $15K. This scenario will save you about $10K over that 6-year period, which is significant. You’ll save $50K over the next 30 years in this scenario- but if you invest that saved money, you’ll HAVE $200K at the end of 30 years. But you can’t afford a $1200/month car payment? Good- none of us can, or ever should. But you can bring that payment down by extending your payments out to 48 or 60 months (the payment on a 60-month loan would be $721/month), as well as providing a larger down payment upfront, or, of course, by opting for a less expensive car. You will ultimately save between $8K and $15K every six years by owning over leasing.
But there’s an even better way than this. The above scenario also breaks my cardinal rule of buying new. Unless you are already wealthy and have already met all of your long-term financial goals, you probably shouldn’t buy a new car- I never have. New cars require us to pay a premium that can easily be avoided. Let me give you a third (and best) scenario.
You buy that same vehicle, fully-loaded, with $5-15K miles on it. Instead of paying $50K+, you pay $38K, and get some extra features too. A 60-month loan at 3% APR will run you $593 per month after your $4K down payment. So, over 6 years, you will now only spend $33K on payments, and still have an asset worth $10K or more at the end. Obviously you can get those payments down by spending a little less on the car, and/or saving a little more for your down payment.
Here’s the summary, over a 6 year period (assuming $4K toward origination fees or down payment, and 12000 miles per year driven):
Total Cost of Leasing (2 lease terms, 2 cars): $38K+
Total Cost of Buying New (0% interest, 1 loan, 1 car): $28K
Total Cost of Buying Slightly Used: $23K
As you can see, the difference between the lease scenario and the used car scenario is $15K over 6 years, or $2500 per year. Over the course of the next 30 years of driving, that’s over $75K saved. If you invest that savings for the next 30 years, you will accumulate nearly $300K. If you’re a younger reader, say 25 years old, and you have 40 years to invest, you’ll accumulate a whopping $675K! All by not leasing that car.
Assumptions: $47,250 MSRP
$3995 origination fees
30000 miles, $0.15/mile over
Total pmts: $15444