Confession: I Leased a Car (?!)
Most personal Finance experts would tell you that cars are a terrible investment. Cars are a “necessary evil,” a steep price to get from Point A to Point B. You’re leaking Money on a depreciating asset.
They’d tell you to avoid debt a car as best you can. Owning a depreciating asset is one thing, but it’s far worse to borrow money against that asset.
And they’d tell you that leasing a car might be even worse because you won’t even own it at the end of the day! You’ve got all the negatives of purchasing or borrowing, but without the benefit of, you know, owning the car.
All of these points are directionally correct. I agree with them.
But I went out and leased a car anyway.
What is Leasing?
If “leasing” is one of those phrases you’ve heard before but never been sure of, it’s simpler than it sounds:
Leasing a car is a long-term rental agreement that allows you to drive a vehicle for a set period and/or set number of miles. A lease agreement generally includes:
- A length of two to five years
- Monthly payments
- You do not own the car. But once the lease has ended, you can often choose to buy the car outright from the dealer.
- An annual mileage limit.
- Maintenance and repairs are often covered under lease agreements.
Just think of it as a multi-year car rental.
Why is Leasing Such a “Bad” Deal?
A few years ago, I wrote a comprehensive analysis of the cost of car ownership. Simply put, most car ownership analyses on the Internet are woefully insufficient, and lead to incomplete, incorrect answers.
The short output of that analysis is that:
- New cars and used cars are essentially the same cost, as measured on a cost-per-mile-driven basis. The car market is relatively “efficient” – used cars are priced appropriately. You aren’t going to substantially improve your finances by buying a used car.
- Leasing a car can typically be 5% to 25% more expensive than buying new or used. The variance in that number (5% vs. 25%) is related to the specific make and model of the car, as well as the interest rate (!)** you qualify for on your lease.
**Yes – a lease involves an interest rate, which means it’s related to your personal credit score.
Now, every way in which you buy a car – new, used, or lease – involves some shared costs:
- Depreciation (applies to all vehicles)
- Insurance (all vehicles)
- Registration (all vehicles)
- Fuel (all vehicles)
- Maintenance and repairs (unless warranty or lease agreement states otherwise)
- Taxes (all vehicles)
- Dealer fees (all vehicles – though purchasing and leasing have different levels of fees)
- Interest (only if a loan or lease is in place).
In my case, I am not paying for maintenance or repairs (nice). But I did pay some extra dealer fees (eww) and the lease agreement involves an interest rate (double eww).
I ran my specific numbers and am undoubtedly paying a premium to lease this car.
Some Quick Numbers…
The most popular argument against leasing goes like this:
You make all of those monthly payments, and after the lease is all done, you have nothing. You don’t own the car. So of course leasing is going to be a terrible financial deal.
The argument is that possessing a car – owning that asset – simply must be a better deal than leasing. Right?!
Unfortunately, that argument is incomplete.
Because the car that you could be owning is, in fact, depcreciating beneath you. The early years of car ownership are the worst years of depreciation. Just how bad is it?
CarEdge has excellent data about car finances. Since I leased a Hyundai Tuscon, the depreciation graph below is worth looking at:
It shows that, after 3 years, a once-new Hyundai Tucson will be worth 65% of its brand-new value. That’s $12,600 of depreciation for this specific car. There will also be repairs and maintenance over the next few years, though we’d expect those costs to be relatively low for a new car. Perhaps a few hundred dollars per year? There will also be fees and taxes associated with buying a new car – here in NY, the 8% sales tax alone on a $36,000 car is $2900.
The point is that purchasing a brand-new Tuscon would cost me at least $16,000 over the first 3 years of the vehicle.
That money is gone. If you want to argue that leasing is “lighting your money on fire,” then you must accept that buying is the other side of the same exact coin. Leasing vs. Buying is simply about which Devil you’re willing to work with.
My leased Tuscon, including monthly payments, repairs and maintenance, fees, taxes, and loan interest will cost $17,180 over the next 3 years.
Yep. $17K for the lease is more expensive than $16K for the purchase.
The Upside of Leasing…?
I still haven’t hinted at a pretty important question: If leasing is a subpar financial move, why even consider it in the first place? Why did I do it? How many times did I fall and bump my head?
Don’t worry. I’m lucid.
I believe that particular life scenarios create an intangible, hard-to-measure value for leasing. And my family is living one of those scenarios right now.
We have a 6-month-old baby at home. And, at least for now, we plan to have more kids in the future.
My old car (a Rav4) was 13 years and 170,000 miles old. We wanted something a little more new – for safety, for comfort, for professional reasons too.**
**While some clients appreciate a financial planner who frugally drives his car until the wheels fall off, other people understandably ask, “The guy with rusty rims is giving me financial advice?!” Put another way: there is a difference between being frugal and being cheap. We each draw that line in a different place. I’d rather not flirt with too many of those lines.
So, a new car was in the cards. But we didn’t just want to get a car for today. We also asked – “what’s life going to be like in 2025 and beyond?” Specifically, what car needs do we have in 2025 and beyond?
Quite simply, I have no idea how to answer those questions.
- How many kids will we have? How many car seats and strollers? How much youth sports equipment? (please – just no hockey!)
- Will our life require two “big” vehicles, or will just one “family car” suffice?
- Will car safety continue evolving? Will we feel the need to chase those new safety features?
- Will a hybrid or electric car just make more financial sense?
For all these reasons (and many more), our most significant consideration for today’s car purchase was future flexibility. We want to be able to have a clean slate in three years and rethink our car situation from the ground up.
The finanical question, then, is “what cost am I willing to pay for that future flexibility?”
I know it won’t be free. If I need extra upside (flexibility), it will come with extra cost. I know that leasing won’t be a cheaper option – it won’t be both more flexible and cheaper.
But for my scenario, the extra ~$1000 amortized over 36 monthly payments** will buy us that flexibility. I’m going in eyes wide open. I can accept that price for flexibility.
**Not to mention, the $36,000 that I otherwise would have spent on buying the car is currently sitting in a high-yield bank account earning ~$120 per month. That interest more than covers the extra monthly cost of the lease. So now I’m genuinely wondering…is my lease actually cheaper?!
The point is, as with many finanical planning topics:
- I did the work to look at the numbers forwards and backwards.
- I thought about the question in the context of our unique needs.
- I made a decision with all the facts, and I’m quite content with that decision.
So if you see a guy racing by you in a new-ish Hyundai Tuscon, well, that won’t be me because I don’t drive that fast.
#fuelefficiency
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-Jesse
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