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I hate pouring money into depreciating assets. An asset should appreciate over time, not depreciate. But, as much as I’d like my car to be an appreciating asset, it’s not. If you don’t believe me, read my dream car article. And, leasing a car is even worse than owning one since you hold only a liability. With that said, we’ll explore why leasing a car is the best choice for me.
Before we talk too much about why leasing a car is terrible idea. Let’s talk about a couple of benefits first.
You get a brand-new car. To a lot of people this is the most important thing. Being able to drive a brand new car grants a status symbol that many desire. You can usually drive a more expensive leased car than you would be able to afford otherwise. Theoretically, a brand-new leased car should also be more reliable and need to spend less time in the shop with maintenance issues.
It is a really horrible deal. Leasing a car is like renting furniture, which is a rip off since you are required to make monthly payments but are left with nothing at the end.
Most lease agreements have a mileage allowance of 12,000 miles a year. That breaks down to driving 32 miles per day. Based on the chart below, you can see the average driver drives 13,476 miles or close to 37 miles per day.
|Average Annual Miles per Driver by Age Group|
The dealership knows that most people go over the mileage amount. In most standard lease agreements, the dealership will charge $0.15 for each mile over the proposed lease life. This means if you have a three-year lease agreement that you cannot exceed 36,000 miles.
Based on the chart above, if you leased a car and drove as much as the average American, you would end up owing the dealership an extra $220 each year, or $660 at the end of your lease. Who wants to constantly be thinking about budgeting the number of miles they can drive in order to avoid paying a penalty?
Another thing to think about- Let’s say that you get in a car accident, and it’s your fault. Guess what, you are still responsible to pay through the end of the lease unless you have gap insurance. Can you imagine making payments on a car that you don’t own AND you can’t drive? No thank you. If you do choose to do a lease, make sure you have gap insurance which covers you for the difference between what you would owe the dealership and what the insurance company pays you.
Now let’s say that you hit a hard economic time and lose your job. What happens if you miss a payment or two? The dealership can repossess the leased vehicle and sell it at auction. Here’s where it gets worse. If the dealership sells it for less than what you owe on the vehicle. You’re still responsible to make up the difference. Unfortunately you cannot use gap insurance to pay the difference between the auction price and what you still owe.
On top of that, if you’re a gearhead and love to make alterations to your vehicle, a lease is not going to be for you. Making any changes to the car will result in penalties and require the dealership to put on OEM parts if you don’t keep the original equipment. So, not only would you waste money on parts, unless you’re going to buy or lease the same exact model, those parts would become obsolete.
Buying at the End of the Lease
Finally, let’s say at the end of your lease you decide that you really love you car and want to buy it from the dealership. If you end up buying that car, you’ll often times pay more money than if you have financed the car to start out. Think about it for a second. You have made monthly payments for the last three years, and then you have to start making payments on the residual value of the car all over again. It would have been cheaper to buy the car outright then pay for the car essentially twice.
Now with all that said, I lease a car. Shocking, right? I am in a unique situation as I have the ability to lease a new vehicle each year directly from a car company which includes the insurance and maintenance on the car for 1% of the purchase price of the MSRP. That means if a vehicle is $25,000, I only have to pay $250 a month for the car.
When you drive your brand-new car off the lot, the vehicle on average loses 10%. Can you imagine any other “asset” that loses 10% as soon as you take ownership? That’s on the first day alone. After the first year the average vehicle depreciates 20%, and then over three years the vehicle has depreciated by 45%.
Doing some research on the internet I found that I should be paying about $150 for car insurance each month based on what the average US American pays in the US.
Now let’s say that I wanted to buy the $25,000 car outright. Right away the vehicle has lost $2,500 the day I drive the car off the lot. After the first year, the car is now worth $5,000 less due to depreciation. This equates to $416 each month that my asset drops in value. After three years, the car is now depreciated 46% or $11,500. This equates to a drop of $316 per month. On top of that, I would be required to pay $150 each month for insurance. In addition, the yearly maintenance on a car is about $725 or roughly $60 a month.
Remember, I only pay $250 per month for a leased vehicle. So, right off the bat, I am saving money by focusing in on depreciation alone if I only keep the car for three years. When you include the maintenance, insurance and depreciation over three years ($536), the lease ($250) costs less than half of what the car would cost over three years.
Now, what if I bought a used car.. Would that be more economical than the lease I am in currently? Let’s say that I bought a used, five-year-old Toyota Camry for $10,000, and it depreciated by 10% each year. Each month, this vehicle would depreciate $83, and I would be paying around $150 for insurance and around $60 for maintenance. This equates to $293 a month. These numbers clearly show that I still save money by leasing a vehicle for $250.
This is why leasing a car is right for me. Is leasing a car right for you?