Don’t Buy the Leasing Lie

Thinking of signing lease to get your next new car at attractive monthly payments? Please, don’t buy the leasing lie!

If you read our last post in this series about how buying new cars is for suckers, you may think that you can outsmart the system by leasing a new car. After all, a lease allows you to drive a brand-new car, and the payments can be substantially less than what you would have to pay if you borrowed money to buy the car outright. But for individual car buyers, leases are perhaps the worst deal on the market.

(Businesses often lease vehicles instead of purchasing them for tax and liability reasons. That’s another topic for another website.)

Leasing may put you in a nice car for a low payment, but it’s an incredibly short-sighted financial move. Most financial experts agree that leasing is the most expensive way for a consumer to operate a vehicle. It’s also one of the most profitable ventures for car manufacturers.

There’s a whole host of reasons why leasing is a bad deal for consumers. Here’s a quick run-down of the most compelling ones:

1. Leasing leaves you empty-handed at the end of the term. When you lease a car, what you’re essentially buying is the right to drive it during the first two to four years of its life — the most valuable period. That’s also the period during which the car is depreciating the fastest. So the manufacturer is basically letting you pay for the vehicle’s depreciation. But because you only bought driving rights (instead of buying actual property), you have nothing to show for all of the money you’ve spent once the lease is up.

Let’s put this in concrete terms: A $250 monthly lease payment on a 2 year term adds up to a total expenditure of $6,000. At the end of two years, your are $6,000 poorer, and have nothing to show for it. I’m no fan of borrowing money for cars, but if you had made a $250 monthly payment on a loan for an affordable used car for the same period, you would have emerged debt free after two years, and would get to keep the car!  Better yet, if you drove a junker for two years and saved $250 each month, you would be able to buy a $6,000 car with cash at the end of the same period.

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2. You pay interest when you lease. It would be easy to think that leasing gets you out of interest payments on a new car, since you’re not borrowing any money when you lease. But it’s just not true — all lease deals include what’s called a “money factor,” which is simply another name for an interest rate. The way the manufacturer sees it, you’re tying up their capital when you drive one of their cars around without buying it… and so they charge you interest, or the “money factor,” while you have their car. The money factor in lease deals often comes out to just as much as a retail auto loan’s annual percentage rate. Sometimes, it’s even more.

What this means is that you’re not only paying for the car’s depreciation — you’re actually paying for more than the value that the car loses while you’re driving it. And you don’t get to keep the car!

3. Stringent limits and fees can cost you even more. When you lease a car, you don’t have free rein to do whatever you want with it while it’s in your possession. The manufacturer is going to stipulate that you can only drive so many miles during the term of the lease — usually between 10,000 and 15,000 per year. If you end up driving more miles than what you agreed to, you have to pay a hefty per-mile fee when you turn in the car. The same is true of wear and tear — manufacturers will build a small allowance for normal road damage into your lease. But if you have one more ding or scratch than what they allow, they will charge you retail price for repairs on those spots once you turn in the car.

If you exceed any of these limits, you’ll have to write an additional check at the end of the lease, just to turn the car in — sometimes thousands of dollars. That means that you’ve paid for depreciation, plus interest, plus extra fees — all on a car that you don’t get to keep!

In the end, leasing is really an elaborate lie. You get to enjoy the luxury of a new car… but it’s a luxury that you could never really afford. Manufacturers make a great profit off of letting you play pretend for a few years. And then they make even more money when they sell your car on the used market.

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If you’re in a car lease, the only way that you can come out ahead is to buy the car outright once the lease term is up. But make sure that you can pay cash — borrowing money to buy out your lease is simply a jump from the fire to the frying pan — either way, you’re getting burned.

Better yet, stay out of leases altogether. And don’t borrow money to buy new vehicles. The wise way to go is to save money ahead of time, then to pay cash for a used car.

Photo by Ross Berteig. Used Under Creative Commons License.


  One thought on “Don’t Buy the Leasing Lie

  1. Josh
    June 2, 2012 at 4:49 pm explains all the reasons why what you just said is wrong regarding leases.

    • June 2, 2012 at 5:16 pm

      Josh, there’s an interesting argument there, but it suffers from three fatal assumptions. In order for that math to work, you have to assume that 1) You will always drive brand new cars; 2) You will always need to finance the car purchase; and 3) You will replace the cars every three years or so with another brand new car.

      Under those circumstances, it may be more economical to lease cars than to buy them with traditional loans. But that’s beside the point, because those three assumptions contradict the greater attitudes and wise strategies that we teach about car ownership: 1) New cars are overvalued and depreciate too quickly. It’s smarter to drive used cars. 2) Debt is slavery. You should save money and pay cash for those used cars, so that you don’t have to pay interest or “money factor” fees to the bank or car manufacturer. 3) You don’t need to replace those cars so often — be strategic in the way you buy and sell used cars so that you capitalize on resale value.

      Poke around the site a little bit, and you can find articles that explain all of those ideas in greater detail.

      • Josh
        June 2, 2012 at 5:25 pm

        I also think that buying only is guaranteed cheaper than leasing only if the car is paid for. Also, when you buy a car, the additional miles you get penalized on when you trade it in or sell it. If we all drove used cars there would be no used cars if you know what i mean..not to mention the monthly tax savings you get in most from deducting the sales tax more than on purchased vehicles. It would also be more beneficial to lease if you own a business and use it for business purposes for obvious reasons (tax, operational, & financial market incentives).

      • June 4, 2012 at 9:08 am

        Yeah, a lot of people like to bring up the thing about there being no new cars if everyone drove used cars. I’m not saying that there shouldn’t be new cars. But right now, new cars are a bad deal because they depreciate so quickly. This is because too many Americans want new cars, so the demand drives those prices up, and drives the prices of one and two-year-old cars way down. If fewer people bought new cars, that would actually boost the value of late-model used cars. If that happened, the depreciation would be more even across time, instead of happening all at once. Under that scenario, there’s nothing wrong with a new car. Unfortunately, though, the current market and consumer habits make new cars a poor value.

  2. Josh
    June 2, 2012 at 5:34 pm

    I think you have to be more practical when calculating the expenses of each vehicle. Leased vehicles for individuals typically are not responsible for tabs, oil changes, other maintenance costs as with individuals who own their vehicles. The sales tax and business tax deductions factored when leasing vehicles, and how much a person wants to acquire a new vehicle (the price of the new car smell, no miles, joy of waxing a new vehicle and showing it off) rather than a old vehicle. Obviously if you can live without a new vehicle than one should but leasing a new vehicle is better than buying a new vehicle. Look at those numbers. Dont just compare leasing a new vehicle to buying a old one because that is like eating at a crappy restaurant versus a nice one. they simply dont compare.

    • June 4, 2012 at 9:11 am

      You’re kind of making my point for me, Josh — Americans are paying thousands of dollars every year for intangible things like “the new car smell, joy of waxing and showing it off.” It might be fun and make you feel good, but it’s not a financially savvy decision. The whole core of what we teach here is that wise money management isn’t always fun, but in the end that discipline is going to pay off in more freedom, more wealth and a better financial life.

  3. Josh
    June 2, 2012 at 10:34 pm

    Debt is not slavery, people who do no know how to deal with it are the problem. Do not blame money for your problems, only the person that manages it.

    • June 4, 2012 at 9:15 am

      I’m not saying that money is the source of the problem — I agree that money problems are all rooted in personal discipline problems. But I disagree with you about debt. We use the Bible as our standard of wisdom and truth here, and it says pretty clearly in Proverbs 22:7 that “the borrower is slave to the lender.” Debt is slavery, no matter how well you “manage” it.

  4. July 7, 2012 at 4:03 pm

    This is the first time i am reading your post and admire that you posted article which gives users lot of information regarding particular topic. Thanks for this share.

  5. Lee
    January 27, 2013 at 3:24 pm

    Leasing can be a very good financial move. It all depends on your particular situation. Let’s say you BUY ought right with CASH, a brand new Ford Mustang GT $40,000. You keep it for 10 years (120 months). A) You’ve lost the use of your 40K, which could have been earning 8% over those 10 years. (Yes, 8% don’t question me on that, it’s easy, even in this 0% interest rate environment.) Which compounded annually, would have turned into $86,357.00. B) The vehicle still had a monthly payment of $333.33 over those 120 months. How? 40K divided by 120 months. either way, you’re gonna pay. It’s all about how you think about money. I’d rather invest the 40K, and dole it out a little at a time. The key to leasing is determining a good subsidized lease by the manufacturer, that you can afford.

    • January 27, 2013 at 9:17 pm

      Lee, you outline an interesting scenario that may work for a few people, in certain situations, if a number of factors outside of their control work out in their favor. But that’s not strategy, it’s a role of the dice. Here’s how your example falls apart:

      1) You assume that you’ll only own the car for 10 years (an arbitrary number), but you haven’t outlined any of the terms of the lease. Depending on how long it is and how much of a down payment you make, you could end up paying much more than $333.33 per month to drive the car. And If you own a car for longer than 10 years, which is very possible, you dramatically decrease the “monthly” cost of ownership, making it a much better deal than leasing.

      2) You’re right that you’re gonna pay either way. But there’s a fundamental difference between money you have in your hand and money that you expect to earn in the future. If you pay cash for a car now, you own that car in perpetuity, no matter what happens. But if you decide to lease, you’re obligated to make a payment every month — and just because you can afford it today doesn’t mean you can afford it tomorrow. A job loss or other financial emergency can quickly put you in a place where you are short on cash, and yet you still have to make that monthly payment (or lose your car). Owning a car protects you from this.

      3) The greatest problem with your scenario is the assumption that your investments will gain 8% each year and outpace what it costs you to lease the vehicle. Sure, it’s easy enough to make 8% in the market right now, but that’s not guaranteed. If you’re investing in funds that earn that much money this year, they can just as easily lose 8% next year. In down markets, investments have lost much, much more than that (remember 2008?). That can happen at any time — it’s entirely outside of your control. If it does happen, it will wreck your whole scenario and leave you dangerously exposed.

      4) A bunch of smaller fees chip away at any investment income that you would have. First of all, the car manufacturer is going to charge you the “money factor,” which takes several percentage points off the top of whatever may earn. And unless you’re investing in IRAs, anything that you do earn will be taxed at capital gains rates, taking another 15% off of your earnings. Combine that with the inherent risk of investing, and it quickly erodes any perceived benefit of leasing.

      5) Some smaller points: Paying $40k for a new car is pretty silly for anyone who isn’t already very wealthy. And there’s no such thing as a “subsidized lease.” Car companies aren’t going to make you a deal that leaves them losing money. They’re in business to make money.

      6) No matter what the terms of your auto lease, the lease is going to run out. When it does, you’ll have no car — in your scenario you’ll have to go get another lease, which requires another down payment. That’s money that you’ll never get back, and it counts against your perceived investment gains (if in fact you actually have any).

      I’m not saying that your scenario could never work out, because there’s a chance that it may. But it’s risky, and its success depends on factors far outside of your control. The bottom line is that as a fundamental strategy, owning an affordable vehicle is much more sound than leasing one.

      You may be willing to take your chances and lease, but that doesn’t mean that it’s a good strategy — it just means that you’re a gambling man.

      • Lee
        April 28, 2013 at 1:45 pm

        1 a)The 10 years wasn’t an arbitrary number. That’s about the time when the manufacturer stops manufacturing parts for the car making it more difficult to get parts. Your assumption that keeping it longer dramatically decreases the monthly cost of ownership is incorrect, It FLUCTUATES. Case in point, the ABS module failed on my 13 year old car. My local mechanic advised that the vehicle needed to be serviced by the DEALER, which are usually more expensive than a non dealer mechanic. I did so, however the dealer advised that don’t make ABS modules for that year anymore. They removed the module. I then had to locate a company that rebuilds those units or purchase a rebuilt one. The company I originally chose, not one but two units failed to work properly. All the while, I had to spend my time sending the units back and forth from the company, then going back and forth spending labor for the dealer to install/ uninstall the units. I had no choice but to chose another company to rebuild mine. That endeavor cost $3200 later NOT including my time and aggravation. Furthermore, I have had to replace shocks, struts, the manifold, and other parts due to wear and tear because of the vehicles increased milage/aging. This INCREASED the monthly cost and will require several more months of keeping the vehicle for it DECREASE. Also, manufacturers today are designing their cars so that only the dealerships could work on them, even for simple things such as changing a bulb, thus increasing the cost of ownership. b) First you negotiate the price of the car without disclosing wether it’s a purchase or lease. (It’s possible to negotiate the price of the vehicle for LESS than what the dealer PAID for it !!! I’ve done this three times for friends) If I were to negotiate a lease, some of the terms which are negotiable would be a 24-36 months depending, you never go over 36 months as thats when most manufacturers warranties run out. (Nor should you finance a vehicle for more than 36 months) Should you reach the 36,000 mies prior to the 36 months, you make sure there’s no early termination fee. You NEVER put any money down! Sign and drive only. Your total monthly payment INCLUDING gas and insurance is not to exceed 8% of you gross monthly income. Many of today’s leases are including such things as GAP insurance, oil changes and other misc, services (this ensures the car was properly maintained upon getting it back), roadside assistance, loaners and even sirius/XM satellite radio.

        2) I wholeheartedly agree with you on this point. However, this is where the individual needs to evaluate wether or not purchasing or leasing makes sense for them on an INDIVIDUAL basis instead of arbitrarily following (possibly biased) advice, on a blog. Is the vehicle going to be used in connection with a business where there are potential tax benefits? Is the person a 22 year old or a retiree as this would dramatically effect insurance prices? Is the person just starting out in private industry subject to being laid off and/ or loosing their job/, or a tenured civil servant where it would take an act of God for them to loose their job? Is the individual willing and able to do routine maintenance and mechanically repair the car themselves, thus not having to pay for a mechanic? The road to hell is paved with good intentions.

        3) The problem here is that your assuming that the 8% figure was an assumption on my part. It was not. That is the long term, lowest, market average. I have personally been investing in a 100% diversified all stock portfolio for the last 24 years and have far outpaced that 8% figure. I remember, and loved 2008 very well. My portfolio dropped 50% in value, affording me a rear buying opportunity. Remember, there are two moving parts to stocks or stock index fund/ ETF’s. The first is the ‘price per share’ or ‘net asset value’, the second part are ‘dividends’ that are paid out. While true that the NAV caused the account value to loose 50%, dividends were NOT diminished. In-fact, some companies dividends actually increased. Had you been a retiree living on the DIVIDENDS, you would NOT have skipped a beat. (Although your portfolio would have been worth-less, the amount of shares owned are etched in stone and do not fluctuate. That is what the dividend payout is based on.) If you didn’t need them, you got to reinvest them at the LOWER SHARE PRICE. Therefore, as articulated above, this would not have wrecked my whole scenario and wouldn’t have left me dangerously exposed.

        4) You’re all over the map with this one. I don’t see what the ‘money factor’ has to do with investing or taxation. I believe they are separate issues. The money factor is simply the lease equivalent of an interest rate you would be charged if purchasing a car, and is negotiable. Again, If a person is contemplating acquiring a vehicle, it’s individual circumstances, on a case by case basis that should dictate weather or not a lease would better suit them. A persons credit rating would certainly determine the money factor, and most certainly the interest rate for that matter. Is the person still employed or a retiree? If the person is employed, does their employer provide them with a company car? If the employer does provide them a company car, may they use it for personal use? If the person is a retiree, do they have a stable source of income such as a pension or an annuity? If the person has a retired with a pension, they are no longer subject to the payroll tax which could then be diverted/ substituted to a lease payment. Wether or not they are they receiving tax free income from municipal bonds form a brokerage account, are receiving tax free income from a Roth IRA or paying ordinary income tax rates from a traditional IRA, or are paying the lower capital gains rates, also from a brokerage account, is an entirely separate issue. Inherent risk of investing? I would arguing just the opposite, the inherent risk of NOT investing. If you don’t invest, you can’t stay ahead of inflation, and thus GUARANTEEING yourself a LOSS to inflation of purchasing power. (That 40K mustang GT today I mentioned above, I purchased for 22K, 14 years ago!)

        5a) That make, model, price etc., was only for illustrative purposes only. b)Yes, there is such a thing as a subsidized car lease. Don’t believe me, GOOGLE it. “subvented/subsidized lease: A lease subsidized by an automaker, usually by its captive lease company, to make the vehicle more attractive. The subsidy is seen in a higher residual value or a lower money factor.”
        Yes, car companies ARE going to make you a deal that leave them loosing money….ON THAT ONE DEAL. Yes, they are obviously in the business to make money. When I’ve negotiated the purchase of a new car for friend’s, I solicit bids from
        several dealerships within a certain radius. This creates a ‘blind bid’ for the dealerships to compete for my business. The process is also designed to ferret out ‘below the radar’ incentives made to dealerships by auto manufacturers that the general public is unaware even exist. As an example, lets say dealership “A” is participating in a program whereby if they sell 200 units that month, receives an additional $250K from the manufacturer. Towards the end of the month, Dealership “A” is 3 cars shy from hitting its sales goal, thereby getting the 250K. Dealership “A”, more than likely will be willing to take a LOSS (minimally) on the last three cars, rather than risk loosing the 250K sales incentive. (I’ve been successful in getting cars 3x prior for LESS than what the dealer paid for that individual unit. Granted they made it up with their sales bonus. )

        6) You will always have a car payment regardless of wether you purchase or lease. If you purchase, be it cash up front or finance, Your just choosing to make a one time payment or payments over a term. It’s an illusion just because you don’t appear to have a payment, you just chose to pay it all up front one time, or over a term. Dealerships are now offering an option allowing you to make ONE payment for the lease term, which it my opinion defeats the purpose. No it doesn’t require “ANOTHER DOWN PAYMENT”. You don’t ever put a down payment on a vehicle that’s not yours for the precise reason that you never get it back. You negotiate the lease lease with no money down, which will require a slightly higher monthly payment. You will always have gains in the stock market, IF you stick it out for the LONG TERM!

        As you can see from above, this can become a complicated matter. Many variables come into play. There is no “one size fits all.” I don’t advocate leasing over purchasing. Some persons might be terrible candidates for leasing while others may benefit. For anyone to arbitrarily take sides is doing their readers a disservice. I’m not a gambling man, I believe in taking calculated, controlled risks, with a contingency plan.

      • May 5, 2013 at 9:38 am

        Lee, there’s way too much here for me to continue to debate with you point by point on the minutiae of leasing deals.If you’ve found a way to lease cars without getting trapped in bum deals, that’s great for you. But the kind of deals that you’re outlining — short-term, subsidized leases with no money down, etc. — are not the kinds of leases that car dealerships are advertising. It’s great that you have the skills to negotiate your way into such an advantageous position, but the vast majority of people do not. Most consumers are going to take the lease offer that the dealership puts on the table… and those offers are almost always a bad deal. For the common reader on this site, leasing is not a good deal. I stand by my original position.

        By the way, I don’t disagree with you that good investments average more than 8% a year. But that’s a long-term average, over the lifetime of the investor. When you’re talking about a three-year lease, though, the only fair way to compare it is with what can happen to your money in the market over a three-year period. Three years is too short a time for the long-term gains of the market to protect you from short-term losses. While I certainly advocate long-term investing (and have taught extensively about it on this site), I don’t advocate trying to time the market or used borrowed money to make quick gains in a short amount of time. People do need to be investing, but that’s an altogether separate issue from how they go about acquiring cars.

        Poke around the site some and you’ll see that my preferred method of car ownership is to buy used cars with cash (until the point where you can afford to buy a new car with cash). Doing this will always, always, always be more affordable than getting new cars through leases or financing. The goal is to get to the point in life where you pay zero interest or money factor to anyone. Money that goes to enriching the bank is money that you can’t use to invest, give, etc. No matter how fancy a lease you can negotiate with a dealer, it will never beat paying cash up front for a car that you can afford.

    • david myers
      February 19, 2013 at 10:36 pm

      How about taking that new car smell money that you`re paying in a lease and invest it as well then you will see a good return on your money instead of paying it to the leasing companies.

  6. David
    June 11, 2013 at 7:00 am

    I get where you’re coming from but there are good deals out there, and I’d like to defend the lease option. For instance, I have a Honda Civic ’13 that I can drive 20K miles per year for 189 /m tax, title, licence included. At the end of three years I get the option to buy the vehicle at the 60000 mile mark regardless of what mileage it is at. When calculating it all out I’d be paying 20452ish dollars for a vehicle that I have driven responsibly. I think that is a huge factor. You can never be sure with a car fax that the car is issue free at 90000. There is a massive list of things that may need to be replaced because they only last 100000 miles, and what about the previous owners driving history? That can affect the cars current transmission, suspension, and the engine wear. You don’t know how long the previous owner really got oil changes. Synthetic vs conventional (big factor in midwest) I understand the biggest problem with leasing is that you have to make monthly payments for a car you replace under most circumstances. But ask yourself if your 4000 dollar beater that probably has maintenance issues is going to be less expensive than a $10000 lease on a car that you can maintain and buy at the end for just 2000 more than MSRP. I plan to keep this car in perfect shape so that if I decide to buy it outright I know that it will stand the test of time. Try getting that kind of confidence in your average used car.

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