How Car Leases Torpedo Your Finances

When people are in need of a car, the focus is on the car itself to such a degree that it can seem as if the purchase is happening in a vacuum. After all, there’s always a dealer somewhere who will show us how we can afford something we’re not really sure we can. Often, that magical way to affordability is through a car lease. It can be used either to enable us to qualify (as opposed to truly afford) a car we otherwise can’t, or to trade up to a more expensive one than we could if we were to buy it outright.

A car purchase is never a completely stand alone transaction. Because of the cost of cars today, buying a new one represents an important component of your overall financial well being. Buying the wrong vehicle, or buying it the wrong way—such as with a lease—can compromise our finances for many years to come.

What’s so bad about car leases?

A car lease is always temporary fix

How Car Leases Torpedo Your Finances
How Car Leases Torpedo Your Finances

Car leases are largely for people who want new cars but can’t afford them. Down payments are typically lower than on purchases and monthly payments can be considerably lower.

The problem with these benefits is that long term they do nothing to improve your financial situation. They’ll put you in a car—a new one at that—but you won’t build equity in it, nor will you be working toward the day when you’ll own it outright.

Ultimately, the lease will always need to be replaced.

You’re locked into perpetual monthly payments

Since you’ll have nothing to trade in when the lease expires, the most likely course of action will be to enter into another new lease. Dealers will make this process even easier by waiving certain exit fees. But don’t be to sure they’re actually waiving them—there’s an even better chance they’ll roll them on to your next deal and you’ll never be the wiser!

A new lease will mean another term of payments—24 months, 36, 42 what ever—but you’ll always have a payment. And that works for the dealers; if you never experience not having a car payment, you’ll never know how good it feels and why you need to work so hard to get there.

Car leases create a future obligations

Part of the reason car leases are cheaper on the front end is because they’re more expensive on the back. The car company isn’t offering a less expensive program for leases, its just shifting the burden from one end to another.

If you want to buy out the lease at the end of the term, you’ll have to buy the car all over again but at a price much higher than what you’d pay for a comparable vehicle on the open market. After all, the dealer has a captive buyer on this!

Even if you want to get out of the lease early, there are penalties in place that you’ll have to pay in order to do so. And at any point you want to get out, the dealer can always assess additional charges for the vehicle condition—real or otherwise.

A car lease forces you to maintain the required maintenance schedule

It’s often said that when money’s tight, the first thing to go is maintenance. Who hasn’t been in a difficult financial position where maintenance had to be delayed, either on a car or some other possession? I’m not recommending this course, only pointing out that in the real world, this is a way people often stretch budgets.

With a leased car however, you may not have that option. Leases contain provisions requiring you to maintain the vehicle to manufacturer specifications otherwise you could be in violation of the contract and subject to penalties. If you’re playing it safe, by having service through the dealer, you’re probably paying the highest maintenance costs possible!

And here’s another drawback to having a leased vehicle—you can’t put cheaper, used parts in a new car, especially one you don’t own!

Leases aren’t just about a monthly payment; there’s a whole chain of other costs that go with it.

You’re bound by a contract for years at a time

None of us ever like to feel trapped. But trapped is what contracts to do us, and whether the car dealer calls it a “lease agreement”, “lease option”, or what ever soft title they choose, you have entered into a legally binding document, better known as a “contract”.

It doesn’t sound quite so benign when you call it that, does it? But that isn’t the worst of it…

Lease contracts are drawn up by the dealer’s lawyers (plural!), not by you and your lawyer. They’re drawn up to protect the dealer and his interests, not yours. A purchase is a one time event; you sign the papers, take your car and go on with your life. A lease is an ongoing process that legally binds you (not the dealer) to certain required performances.

Nope…it’s not benign at all.

A car lease leaves you with nothing when it’s over

People who enter car leases typically go in with nothing, and come out with basically the same thing—that is if you ignore the various exit fees that aren’t so easy to determine during the course of the lease.

Under the best of circumstances, you’re no worse off than when you started (not likely), but you still have no money or trade-in equity as a result of having the car for several years. No matter how leases are packaged, no matter how well priced, this fact is inescapable and by itself it’s sufficient reason to avoid the whole mess.

Our financial goals should be based, at a minimum, on a plan of always moving forward—if only a little bit at a time. Car leases don’t enable us to do that.

A car lease creates an appetite for new cars

This can be the biggest torpedo of all, and most of us never think about it. When you lease a car, it’s a new car, not used. This means you’re always driving something that’s new, and that’s a form of addiction.

Let’s be honest, few trappings in life massage the ego quite like a new car, and if you’re used to driving them—if new is the norm in your life—you probably won’t consider buying something used. Even though it would make much greater sense from a financial standpoint.
With all that going against car leases, why not plan to buy a good, used car instead? It may not be quite the emotional buzz of having a new one, but your finances will thank you for it. And you might even sleep better at night!

Have you ever leased a car before? What were your thoughts about it?

( Photo by donandcarol )

18 Responses to How Car Leases Torpedo Your Finances

  1. A car lease has one benefit; it allows you to drive a new car even if cash flow is tight. Typically, that means people who are in the prime of their mortgage-load, child-rearing years, whose cash flow is otherwise consumed. In the long run, they’ll lose more money on a lease than on a purchase, of course. The alternative is to buy a used vehicle for a lower price; they’ll save money in the long run and do as well with cash flow as on a lease. With a used vehicle, you don’t have some of the headaches listed in this post, but you might get others (especially if the vehicle is “very” used).

  2. Tony – the one important advantage of the used car though is that they’ll have equity in a few years, and that will enable them to have more choices when it comes time to replace it. With the lease, there’s never any equity–only perpetual liability. If they’re lucky they won’t have to write a big check to get out of the old lease. Or, they may have a deficiency that gets rolled over to the next lease, and then they’re deeper in the hole than they thought.

    Even if money is tight, it’s important to set the financial elevator to rise, at least gradually, over the long run. With leases, it’s always heading down.

  3. Great article Kevin. Very good points made about the downsides of leasing a vehicle. Your argument about getting nothing out of a lease sounds similar to the one that homeowners make for owning a home as opposed to renting. Do you consider the logic similar?

  4. N.W. J – Not necessarily. I’m of the opinion–at this point in time at least–that the decision to buy a house depends heavily on an objective view of your career prospects. Signing onto a 30 year mortgage when your career is held together with tape and glue is probably not a good idea. A lot of people are in that situation right now. Geographic job/career mobility is important, and not easy to maintain when you own a home.

    A car on the other hand is a series of relatively short commitments–3-5 years typically. You can usually sell them a lot quicker than a house, and the dollar amounts at risk are much lower. Right now houses aren’t terribly liquid, so if you had to move to follow a job you could be boxed into a corner. The loss could be catastrophic.

    Another thing to think about is the real estate market in your own area. Some markets are better than others. In some locations, house prices have fallen so far that a mortgage payment is cheaper than rent. In others, prices are still speculatively high.

    I think that now more than anytime in my life at least, the decision to buy a house has to be based on you’re personal circumstances, general rules of thumb don’t apply any more.

  5. Definitely agree with your post. I have a friend that leases because he “needs” to have a new car every few years. He’s always ready for an upgrade. But now that he is starting a family, I think he’s realized that leasing really puts a dent on your finances. And I completely agree with you, Kevin, that renting a house is not like leasing a car. Buying a house requires a much bigger time and monetary commitment. Also, if you have to move to a different location for a job, you can bring your car…can’t bring the house.

  6. Hi Andrew – Of course most people recognize immediately that your friend’s “need” for a new car is completely manufactured. The car companies have something to do with that. But just as there are people who are addicted to the latest technological gadget, there are also those addicted to having a new car. But if you add up what cars cost, it would make a strong case for cutting that very large expense as much as you can. A person should only have so much money parked in the driveway!

  7. I leased two cars in my life. the first one was a fun car my wife wanted. The second one was a long term car. When the lease on the second car expired, we decided to buy the car and keep it. However, I will never lease another car because, as you said, I have nothing at the end of it. I have simply driven a car, worrying about the mileage and the dings, for 36 months and then get to do it all over again.

  8. I did the same thing Rick! My second new car was leased, but after the initial term, I bought it out. Still wasn’t a very good deal and I’ll never do it again either. After the 8 years it took to lease/pay off the car, there wasn’t much in the way of trade in value, so my next car was used. That set me up to buy my next new car thankfully.

  9. Timely post for me Kevin as we are looking for a new vehicle and I’m looking at leasing for the first time ever. Not sure that’s how we will go, but I’m considering it. We are the types that keep cars until they die which is good, but based on our expenses over the past few years on one of our cars I’m not really sure that I come out any worse by leasing and I don’t have the cash out lay to the same extent up front. Further there are at least two companies that a fellow financial planner has use that offer a means to sell a lease if it doesn’t work out. I’m still investigating and certainly haven’t decided to go that route.

  10. Hi Roger – I think that leasing can work if you do it through a corporation that has the car, but otherwise I’d tread lightly. Those lease arrangements are written up by car company attorney’s and they completely protect the car companies. Have you looked into buying a used car?

  11. First let me say that I have never leased a car. I have bought new cars and I have bought used cars. My wife & I currently own three vehicles, the newest we bought used and we’ve had for almost 3 years. It has over 80,000 miles on it. The other two have 150,00+ and are about 10 years old. I’m that kind of guy.

    That said, is their ever a case where leasing a car makes sense? N.W. compared to leasing a house and you agreed there are reasons, but you focused on the buy case, not the rent case.

    What about a person who only wants/needs a car for 4 or 5 years? Seems like a lease might make sense. I agree that most leases today are stacked against you, but from a strictly financial case, leasing might make sense.

  12. Hi Randy – Like I wrote in the response to Randy, I think it can make sense for a company, since you can expense the vehicle. But for an individual, where having equity in the car is important, and you’re trying to build financial freedom, I don’t see it. Better to buy a car and sell it after 4-5 years so you have something to trade. Does that make sense?

  13. This is why I not only don’t own/rent a car, but I am not even considering it as a viable option. The amount of money that I save allows me to go on an expensive yearly vacation!

  14. Hi Jacob – That’s an outstanding option if you can work it out. A car generates thousands of dollars in expenses each year, and two cars creates twice as much. If you can eliminate it you’ll have plenty left over for everything else. Of course, it helps if you live in an urban area well served by other transportation options.

  15. When we bought our last car we got pressure big time to lease a car. It’s just not for us, and for many of the reasons you gave. I would hate to have that ongoing payment schedule and be concerned about what happened to it.

  16. Hi John – Dealers push leases in large part because it does a better job of locking you in as a future customer than a outright purchase does. You might go with the same dealer at the termination of the lease so that the exit penaties won’t be as severe. If your next car is also a lease you may become a customer for life.

  17. Honestly though keeping the car you have and saving that lease payment that you would have paid for a year or two would give you a good chunk of money to just buy a car outright. If you are super rich then and you don’t care about throwing money away with a lease it’s not a big deal, but for most Americans a lease will kill your budget. Let’s be honest though. The average American that leases a car has probably never done a budget and that’s why they feel like it’s okay to lease a car.

  18. Hi Jordan – I agree with all that you’ve written. People typically get into leasing when they can’t buy. And if you can’t buy outright, you probably shouldn’t lease either. I like the recommendation to not buy more car than you can afford, even if it’s a $2,000 “beater”. Car expenses are a real budget buster and what makes it worse is that the total costs of owning a car aren’t always visible. I’ve leased and I’ve owned, and I’d much rather own a car outright. It just gives you more options going forward.

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