Before I dig into this subject, I just want you to know in full disclosure, that I have in fact leased a car in a previous life (full of debt). Also in full disclosure, it was one of the worst financial decisions of my life.
I did wind up driving that car for almost a decade, which some would say made my purchase “worth it”.
I vehemently disagree for all reasons I will outline here in this post.
I’ll go into some very specific detail so that we can use this post as a complete "mental exercise" that will hopefully build up your defenses against all the “logic” that will be thrown at you by our culture.
Keep in mind this is a culture that thinks that it’s “wise” and “sophisticated” to lease a vehicle.
This is the same culture where 78% of the population lives paycheck to paycheck regardless of their paycheck's size.
So, the propaganda about the "wisdom" and "sophistication" of leasing a vehicle a bunch of hogwash and we’ll dig into the specific details as to why it is a bunch of hogwash.
But first, here’s a 30,000 foot view of the 6 reasons you should never ever lease a car:
So, let’s dive into all six of these reasons by using an illustration that might be palatable for you.
This is how they get you. Be careful. Be very very careful.
Let’s say you go down to the car dealer ship and buy a decked out, almost fully loaded Honda Accord for $30k (I know, it’s probably more like $35k, but stay with me here).
This means the manufacturer makes and sells the car for $30k.
So far, so good. There’s already a fair amount of profit built into this scenario. Being a capitalist myself, I don’t mind this.
There’s risk and reward on the part of the manufacturer and dealer and that’s worthy of profit in the free market.
Consumers that understand this are ready to negotiate based on factors like: time of the month to buy, demand for the vehicle in the market place, resale value, etc..
But, a really intelligent consumer (i.e. you) is going to just jettison the whole “buying a brand new car” thing and instead go find something used.
They (meaning you) would rather buy a car that someone else has already taken the (significant) depreciation on.
And that’s the first reason you don’t want to EVER buy a new car, depreciation.
The harsh reality is that vehicle you just purchased will be worth, on average, 60-70% less in 4 years. This doesn’t even take into consideration the 10%+ it depreciates the moment you drive it off the lot (https://www.carfax.com/blog/car-depreciation)!
In other words, that car you just bought for $30,000 will be worth about $9,000 in 4 years time.
Am I the only one that feels like I just got kicked in the stomach?
Do you Pinterest? Pin this to your favorite board and maybe helps someone in your circle of influence to avoid this awful mistake.
So, let’s say that you’ve weighed the “pros and cons” of buying vs leasing (which no one ever actually does) and the incredibly charismatic and charming car salesman talks you into leasing the vehicle.
With a lease, you’ve just walked into basically what amounts to a rental situation. So, instead of selling you the car, the dealership rents or “leases” you the car, knowing the car will be only worth $9k in 4 years.
And, in order not to lose money, they need to rent you the car on a monthly basis for more than the monthly amount of depreciation on the vehicle.
Broken down this would be $21,000 (the 70% depreciation over 4 years) divided by 48 months (4 years) which equals $437.50 per month. That’s the minimum amount they would need to charge you in order to break even on the depreciation.
Now, we both know they’re “not into” breaking even. There will be profit built into this. My guess is that this payment would likely be closer to $450-$500+ per month.
But wait, it gets even better (for the dealer, that is)...
The financing piece, I’m sure as you might be guessing by now, will now bring in more profit than the actual sale of the car.
NOW, the dealership has (at a minimum) $437.50 per month + profit + interest on a $30,000 note.
Just to recap where we are so far, you the consumer pay:
Also, keep in mind, the interest rate will not be disclosed because technically it’s not a loan and the normal FTC (Federal Trade Commission) disclosures are not there because, technically you are “renting” the car.
The average car lease carries a 14% interest rate (cost of capital according to Dave Ramsey).
Additionally, if you exceed the allotted mileage of the lease term and cause what they deem “excessive wear and tear”, they will charge you for it.
So, we’ve looked at all the ways you lose money by making the decision to actually lease a new car.
Now, let’s take a look at what you’d be losing by not instead investing that capital.
The possible profits on investments that would have earned you could potentially be anywhere 4-12+% over the course of 4 years.
So instead of losing $21,000 on your leased vehicle, you could have kept your $30,000 plus gained an additional $3000-$17,000+ in interest (compounded).
Here’s a great interest rate calculator to help you run some scenarios yourself: https://www.nerdwallet.com/banking/calculator/compound-interest-calculator).
Now, I know the logical argument goes something like, “but Brad, I need a car to get around. Your scenario is completely unrealistic.”
I know. I get it. It’s almost impossible to function in this culture without a car.
But, my challenge back to that is, why do you have to spend $30k of money that you don’t have that you’ll have to pay back with interest?
Why can’t you instead spend say, $10k on a car and invest the other $20k?
So, leasing a car causes you to lose money in the following 6 ways:
The moral of the story is, please don’t lease a car (I beg you).
Your future self AND your current finances will thank you profusely.
So, that’s both the call to action and your homework for today. :)
And, I’m curious, have you ever leased a car?
What was your experience like?
And, based on the information in this article, is leasing or even buying a new car still something you would consider?
So tell me in the comments section below, have you ever leased a car? What was your experience?
And, if you haven't yet leased one, have I made ANY progress in dissuading you?
And now that we've addressed steering you away from leasing, let's talk about sacking your debt.