By: Mike | Miked Up Blog “Alright, class. Hands up if you’ve ever leased a car…” As the instructor deliberately surveys the group, her eyes can’t help but land on the guy in the back row with his hand up. He’s wearing a bro-tank with his hand about 3 inches above his head at just the precise level where he could either be admitting that he’s leased a car or that he’s going for a quick swipe of the forehead… It’s just too difficult to know for sure. As the instructor studies further, she sees the text on his bro-tank… It reads the title of some obscure personal finance blog she’s heard of. The instructor points... "You, there. You have leased a car???" The embarrassed but proud gentleman raises his arm above the threshold and nods his head. “Two actually…” "WHAT!?!?!?"
Although my nightmare above had ended, the well-clad blogger above was, in fact, me and YES – I have leased 2 vehicles in the past. Was I right, was I wrong, and is it ever OK to lease a car? I’ll answer all of these below.
First things first, you need to identify your current situation and goals. For example, if you are in a decent financial situation and driving a relatively new car is important to you, then by all means – lease away. Maybe you need to impress clients with your job? Perhaps you don’t drive a ton of miles (don’t have to worry about mileage limits) and you enjoy the comparatively lower monthly payment of leasing vs. buying a vehicle… Maybe this person is you and if so, I say – Good for you. Got get ‘em. If there’s one thing that’s true it is that we are all unique individuals and what you value in life may be completely different than what’s high on my list. I have no argument with that individual. However, if your goals are strictly financial (i.e. financial freedom/independence, building wealth, and/or getting out of debt), most often, leasing a vehicle is the forbidden fruit that will not bring you to the financial pearly gates. For someone on the path to Financial Independence, a perpetual vehicle lease is an anchor.
- The monthly car payment will never go away. When one lease is up another begins.
- There is some argument about whether a vehicle is an asset if owned outright. I say that for anything you have the ability to trade for cash – this is an asset. Most certainly a car is a rapidly depreciating asset… But it is still an asset. So, once the payments are gone, not only are you no longer making payments, now you also have increased options with regards to selling your vehicle.
- Leases are restrictive on the number of miles you can drive. If you exceed this cap, sure there are options… Bad ones. You can either pay a per-mile penalty or commonly get the overage ‘forgiven’ by enrolling in a new vehicle lease again.
- “Tax, title, and registration” are terms you’ll hear more often – because you’re paying them with every new lease term. Sure, they’ll roll into your 24-36 regular payments, but the cost remains.
- You’ll have to return the car looking like new to avoid additional fees for damages. So, heads up for all the other people parking in that parking lot as well as on the road. Also, if you’ve got kids that like playing sports – this is your warning.
Each of the above bullets describes a way that money leaves your bank account (via monthly payments, fees, taxes, overages…) and thus gets you no closer to financial independence.
So. What is a financially-minded lady or fella to do?
The painful truth is that if financial independence is your primary goal, your fastest course forward is to sell whatever car you are currently driving (or wait for your lease to expire) and use the money to buy a well-used vehicle that can get you where you need to go. That is if you can’t use a bike as your primary mode of transportation (that’s a bicycle, not a motorbike). In this scenario, you’ll buy a $2,000-4,000 vehicle outright, then use the monthly payment you had been making and put that immediately into a savings account each month. This account would grow with time and eventually be your emergency fund or the fund that will allow you to pay cash for a more reliable version of your gently-used car that may now remain yours for the next decade or so. If you need to take a loan out for your $2,000-4,000 car, this just delays the formation and growth of your ‘next-car/emergency’ fund. No worries, we all travel our own path. Next, you will proceed to change the channel during vehicle commercials, avoid the car lots, and not ever think about buying a car again until you are either forced to do so or reach a closer proximity to financial independence. The car will become a means of transportation only. But, much like a surfer treats the ocean with respect, you too will respect your vehicle. Change it’s oil, keep up on the breaks, tire rotations, and other ‘interesting’ noises. I never said that owning your own vehicle for a decade won’t have it’s share of repair work that comes with it (I’ve had my sedan for over 9 years now and it has been one of the best financial decisions we’ve made – ultra reliable and because we take good care of it, the Camry remains our road trip vehicle of choice).
Don’t come at me with the whole, “Repairs will cost more than the lease payment!” nonsense…
I’ll be conservative here. Like I said, we’ve had the Camry for 9 years and we average around $500/year in repair/maintenance costs. That’s 4 oil changes, the new breaks, tires, or random happenings that pop up. If you got a steal of a deal on a lease and pay $250/month, you’d be averaging $3,000/year… And that’s not counting any oil changes or other maintenance issues that may or may not be covered under your lease. If we get crazy for a minute and extrapolate: allow me to show you two scenarios. A) You buy your 3-year-old Camry outright from a dealer (assuming 40,000 miles, good condition, and some of the bells and whistles). Right now, I’m seeing 2015 models for about $16,500 – easy. Add in our average of $500/year in maintenance/repair cost and we are at a total of $21,500 in a decade. B) You get a ‘steal of a deal’ and make perpetual lease payments of $250/month on a brand new but similar vehicle. Even if you pay nothing at all for maintenance… You’re at $30,000 out of pocket. You make a more realistic payment for a car with similar features of $300/month and now you’re looking at $36,000 over your 10-year period. Either way, you would be saving over $8,000 to buy a nice car in scenario A, over the course of 10 years. $8,000 is $8,000. That’s a significant amount of money no matter how you slice it.
Given the above information, why did I lease a vehicle on 2 separate occasions?
I made a rookie mistake and leased a brand new BMW 128i. I have no excuses and this was pre-financial blogger Mike. I wrote a story or two about the decision a while back and although I did meet Monica (my wife) while I had that car – she wouldn’t have recognized it from a Chevy Cavalier back then (that’s when we still had those…). The price for my first education in leasing… A mere $427/month… I know, I know. That’s $15,372 over the 3-year term and it was brutal. I ended up having to find someone to sublet it from me midway through the lease.
It was September of 2012. We were recently-weds and Monica was just starting her third year of dental school. She had driven a ’00 Honda Accord up to this point that had been a hand-me-down but there were some critical issues coming up in the vehicle. It was starting to lose its ‘reliability’ luster and began breaking down on occasion. With the long hours of dental school, the prospects of having her broken down very early in the morning or very late into the evening were all we needed in order to sell the vehicle. The other major variable to our financial situation at the time was dental school. We were in hyper-frugal mode to dramatically reduce expenses and ultimately the debt we would need to take out for her to finish school. Because of this, there was no extensive emergency fund (think $1,000 total – Dave Ramsey style). We took the minimal gains from the Honda, paired it with our emergency fund and started shopping. There wasn’t much that eclipsed the Accord in terms of reliability. Big city concerns with a solo-traveling female weighed heavier on my mind, especially with my ‘protect this house/family’ instinct firing on all cylinders (recently-wed), so we went to a dealership and negotiated for 4 hours with the salesman. We came away with a brand new Chevy Cruze at $179/month for 3 years. The $6,444 total for the lease was a price we were willing to pay so that Monica could drive a brand new and reliable vehicle to finish out dental school and start her professional career. This cost was well worth it in our minds. Yes, we could’ve gone with the ultra-frugal route, but at that time we placed more value on reliability than cost savings when it came to transportation.
There is no absolute ‘right’ or ‘wrong’ to the lease conundrum, especially in our modern financial environment. People place value on different things at different times in their lives. Of course, we can all calculate the total cost of ‘ownership’ (or lease-term) and weigh those values to determine which would be the most financially responsible option. We could talk about buying a beater and ‘driving it until the wheels fall off’ all the while stocking that ‘car payment’ away into a savings account so that we can pay cash for the next car, but not one of those calculations take into account the extraneous variables that shape our lives in the present moment. Maybe you’re buying a car for your daughter that’s going off to college or maybe you’re a college student yourself that just needs to make it to campus then burn the thing down until summer break… Who knows? That’s the point. You do you. And as long as you understand the variables and costs that shape your decisions, AND you chose responsibly (not my BMW situation), you will make the correct decision for YOU. Republished with the permission of Miked Up Blog.