Why a Car Lease is a Bad Deal

How can I make a blanket statement that a car lease is a bad deal? The attraction of an auto lease arrangement is that it typically requires little cash up front (the cap cost reduction fee can usually be satisfied with your trade in and/or the rebate program de jour), and the low payments for the initial 24 to 36 months of the lease. In fact for a person who likes to trade for a new car every two or three years, the arrangement seems made to order. And if all that matters is the monthly payment then that may be true–within limits.

So, what’s so bad about leasing?

You owe something, but you own nothing

One of the central problems with auto leases is that they put you into a perpetual state of zero or negative equity in your car. Though the lease is secured by the car you’re driving, you have no collateral to back up the loan because you don’t own the vehicle securing the lien on it. The dealer has both your note and ownership of the car!

Why a Car Lease is a Bad Deal
Why a Car Lease is a Bad Deal
You and the dealer can call the payment plan a “lease” all you want, but it will show up on your credit report as a payment arrangement with a monthly payment, specific term and balance, and that’s exactly how the leasing company will carry it on their books. All of which looks curiously similar to a traditional loan, and this has meaning.

Limited future options

Unlike leasing a house or apartment for which you pay an agreed upon monthly fee, car leases are set up like loans, meaning you’re on the hook for the full remaining balance of the lease at any point in the term. Most will allow you to get out ahead of schedule, but you will be subject to penalties that can be stiff, especially in the early going.

Once you’re in a lease, there’s virtually no way to get out without incurring a battery of fees established for the primary purpose of keeping you in the deal until the very end, when still more fees may apply. All of this spells limited options, and with the ever changing nature of life, can any of us afford to lock ourselves into a financial arrangement that offers so little flexibility?

Fuzzy provisions that favor the dealer

Leases also come with mileage limits, which if exceeded will be assessed a per mile charge, as well as maintenance fees if the car is deemed to be in a condition which is in excess of what would be considered normal wear and tear. This type of verbiage is suspect since a word like “normal” is totally subjective. We may consider dings and dents to be normal wear and tear, but the dealer may see it differently. And keep in mind, it’s the dealers attorney–never ours–who prepares the lease contract.

On entering a lease, we can base our cost expectation on recent driving history, but what if that pattern changes at some point during the lease term? What if, for example, you leave an office job with a 20 mile per day round trip commute for a sales job requiring you to drive over 100 miles per day?

In such a situation, there’s no way to know for sure what the ultimate cost of the car lease will be, since you’re now in a situation of open ended variables.

Negative equity on purchase conversion

There’s usually a price at which you can convert the lease to an outright purchase, but the cost of the buyout will almost certainly be higher than the underlying value of the vehicle. Should you decide to buy out the lease, you will have spent the lease term itself owning nothing, and the first few years of the purchase loan term being upside down, with a higher loan balance than the vehicle is worth.

The low down payment and the low monthly payments that feel so right when the deal is initiated, convert to a bunch of hard to understand gotcha provisons, all working in favor of the dealer.

Nothing to sell or trade for the down payment on your next car

This is probably the most damning provision of car leases. Once you’ve completed the original lease, you won’t have any trade-in for a purchase or new lease, plus there will be termination fees and possibly mileage and maintenance charges as well. Not only will you have no money for a down payment on your next car coming from the current one, but you’ll most likely have to write a check just to get yourself out of the original deal.

In this way, a lease keeps you from ever getting ahead on your automobile asset; you will most likely go into your next deal from a position of weakness, forced to rely on the mercy of your original dealer, or of another dealer, to structure the arrangment on your next car in some way that’s affordable for you.

Complexity – why a car lease is a bad deal

This isn’t really a financial issue, but if simplifying your life is a goal at any level, leasing a car won’t help with that pursuit. Buying a car is pretty simple. Leasing is a voluntary plunge into complexity. When you enter a lease with a dealer, you’re accepting dozens of terms that you may only partially understand, and guarantying that you’ll be dealing with your dealer at some point in the future under less favorable circumstances.

You will, for example, always have to worry about exceeding your mileage limits, maintaining the car in perfect condition and facing the prospect of an uncertain cost on the back end of the lease. None of that is conducive to simplicity, to establishing future plans, or even toward getting a good nights sleep.

With leasing, all the good news is on the front of the deal, but the back is where things get ugly. The strongest argument against leasing is that your options outside of the lease are very limited and you will be trusting a significant portion of your future budget to the leasing company.

If cost is the reason for leasing, it will usually be better to either buy a good, late model used car, or a lower priced new car. Either way, once the car is paid off, you’ll have something to sell or trade for a down payment on the next car. And just as important–no gotcha provisions!

Have you ever leased a car? Did you feel that you somehow “came out on top” in the deal? Or was it one of those situations you wish you’d never gotten into?

( Photo courtesy of ricardodiaz11 )

28 Responses to Why a Car Lease is a Bad Deal

  1. I hate leasing! We tried it once because the monthly payment was so much less than if I purchased, and I thought it would be a maintenance free couple of years.

    I was wrong. We went over our miles even though I bought extra. I had to buy new tires because the factory tires wore out so quickly. Even though I did lease pull-ahead, they still prorated the miles using some ridiculous formula. So, even though the actual miles driven was less than what I purchased, they based the cost on the miles driven per month compared against the allocated miles per month or something really stupid like that. I am still livid about it and it was 2 years ago.

    I do know some people that bought their leases and negotiated a pretty good deal. So, if you are thinking about buying your lease vehicle, try and get a few thousand off.

  2. Everyday Tips – I leased a car many years ago, but decided that buying at the end of the term was the most cost effective way out. Four years on the lease plus four years financing the balance–EIGHT years of monthly payments! Not a smart deal. But at the time leases were extremely popular and I followed the herd into oblivion. Never again!

  3. Owning a car I always found to be one of the biggest liabilities a person can saddle themselves with. It’s a painful thought to even own one of them.

    To list all the expenses/liabilities from owning a car…
    – Car Insurance
    – repairs and maintenance
    – The huge capital required beforehand
    – Interest payments on that capital
    – Gasoline
    – Annual depreciation

    It’s staggering, really. And most certainly a liability to own one. Being behind the wheel is a scary enough experience for me as it is. I’ll be damned if I ever even think about getting a car! I’d rather buy assets with that much money. With what a high grade car would cost you today, along with the cashflow to maintain one, you could solidify your financial future with it!

  4. Aury – You make a compelling point that if you tally up all of the expenses that go with owning a car, it really does look like a financial disaster in the making. But there are less expensive ways to do it.

  5. Wish I had read this article a few years back. Worst financial mistake we ever made.

  6. Perry – the past is a done deal, but you’re wiser for the experience and will do a better job in the future. That’s all that really matters!

  7. “You owe something, but you own nothing.”

    That is brilliantly well-stated, Kevin. You could have stopped there and made your case, but you then proceed to add five more reasons that are almost as compelling.

    Once my 1997 Honda Civic finally bites the dust I’ll buy a used car (probably another Civic) a year or two after it was driven off the lot. I suspect that won’t happen for another five or six years.


    Len Penzo dot Com

  8. I’m with you Len, USED ALL THE WAY! As Aury wrote above, the costs of owning a car are out in orbit, and we need to do the best that we can to cut it down as low as possible without sacrificing safety.

  9. Hey Kevin, Well said!

    I know plenty of people that swear by leasing and have been doing it for years, but I’ve always felt it was inherently wrong. I want ownership after I make payments for years (although I’d prefer not to make payments at all). And the whole watching how many miles you drive just seems like an extra pain in the butt.

  10. Car Negotiation Coach – I completely agree. I’ve known many people over the years who swear by leasing too, and I think there’s a healthy dose of self-hype in the mix.

  11. Cars can certainly be a vexation to the spirit no matter what path we choose. The first mistake often made is to look at a vehicle as something more than transportation. The exception to this rule, in our view, would be those in professions where image can directly affect the bottom line. Would you likely choose a neuro-surgeon to operate on you who drove a reliable but very out of date and tattered looking vehicle?

    Most people want the reliability and service that comes with a new car, or a leased car, carrying a service warranty. Personally, we would rather have an old back-up car, AAA towing service and a trustworthy mechanic to cover the reliability uncertainty because the cost of buying new or leasing represents such a huge hole in one’s financial bucket when factored over a lifetime.

    There is nothing quite like cheating fate when successfully cranking the engine over on a very old car and it gets you to work and back home again each and every day, over and over again, without fail. If it does fail, you’ve got you’re back-up vehicle, AAA towing service, or can catch a bus, cab, or ride with a friend.

  12. Steven and Debra – that brilliant, having a back-up vehicle, Triple A and emergency transportation network. Sometimes you need all of that even with a new car!

    I agree that some professions may require having a late model car, but I’d also warrant that there are far more people claiming as much than there are those who actually do need to project that image.

    As an example, sales people are heavily into the new car-as-an-image-maker mindset, and heavily prone to lease to support the habit, but I get turned off by sales people with high end cars, knowing full well that there’s a long trail of victims who paid for it. That may not always be true, but it’s my perception.

    “You are what you drive” is an expensive lifestyle, and not one I intend to pursue.

  13. your first point was going to be what I said. At the end of the lease, you don’t own anything. Paid all that money for nothing. Bad idea.

    Lets not forget, leasing can be very expensive.

  14. FB – so true. Long term it IS expensive, but the hook is that it tends to be less expensive during the first few years. The “buyer” is hooked into leasing, then he can’t easily get out of it later.

    Best thing may be to admit you made a mistake, buy out the lease, pay off the car, and start over from square one. The biggest mistake would be rolling into a new lease, which is often the path taken.

  15. What about if you lease a car for business use and can write off the entire payment on your taxes?

  16. When you add up all the payments, and compare it with if you purchased in cash and the depreciation rates… leasing is dump unless you have a business to help write off the expense.

    If you cn’t pay cash, you can’t afford it!

  17. Sam – I completely agree. Leasing should mostly be for special situations, like a business where you can expense the payments for tax purposes.

  18. This is very interesting and I have to say I have had a different experience. I have leased my last 4 vehicles and wouldn’t do it any other way. I enjoy the idea of having a new vehicle ever 3 years and while leasing, I have virtually no maintenance expenses outside of oil changes. Even those are sometimes covered by the dealer.

    I have gone over miles on 2 of the 4 leases and have never had to pay the “overage fee”. Everything is negotiable and if your current make will not wave the fee, another make would love to “get you in their family” and will work with you.

    While I understand it isn’t for everyone, it has certainly worked for me and my family.

  19. Hi Adam – Perhaps you have a preferred package deal? Your URL shows you to represent comcast business. I’ve leased a couple of cars and never got waivers like the ones you describe.

    Has anyone else had basic car lease provisions waived?

  20. I guess I am not exactly sure on “preferred package” deal. My understanding is a am simply getting a standard lease. As for waiving the miles, my experiences have been to go into the dealership and negotiate for the next vehicle. If you inform them that you are ready to get another from them but do not want to pay the overage fees, it has seemed to work. In one instance I leased a Pontiac and ended up getting a Nissan as they told me if I got a vehicle today, they would pay the overage fee for me. I made sure there wasn’t and fees in the final paperwork.

    I would love to hear what others think and if there are any similar instances out there.

  21. Hi Adam – What I’m referring to by preferred deal is a package deal that you may have as a result of your employer. You work for Comcast so perhaps you get a preferred deal as a result of your affiliation with them.

    One other thing, from what I know from people in the car business, those waived charges often get transferred to your new deal through accounting tricks. This is much like rolling a car loan deficiency from an old car to a new one, and then you’re “upside down” on the deal from the beginning.

  22. Leasing is definitely not for everyone, but there are advantages to it over buying. For example, some people like the idea of swapping out their car every 3 years. If that’s you, and you get a decent deal, it is not only simpler but also cheaper to lease a car than it is to buy and resell. Of course buying a used car will be cheaper, and buying a new car leaves you more secure, but if you want a new car with fancy options, the benefits of leasing can in fact outweigh the disadvantages.

  23. I have always owned (both used and new) until my current vehicle (which is a lease). I have actually really enjoyed having a fairly fancy new car with all the bells & whistles at a monthly rate & lower up-front than I would have gotten for the same car on ownership. I have a very short commute and am currently tracking well UNDER the annual mileage limits. My lease is up in July and I’m not sure, yet, what I will do — lease another or buy a new car, but I likely will NOT buy this car. The dealer keeps trying to get my to do a “pull-forward,” but I checked the TRV on Edmunds and my car is worth more than the buy-out (probably because it’s a luxury hybrid), so the common wisdom seems to be to wait until my lease-end. I think leasing is similar to renting a home (vs. buying). It depends on whether you are in it for the long-haul or you want to be able to move around at the end of the rental term.

  24. Hi Cinnamon – It’s sounds as if you’re really not sure, even though you like the idea of having the leased car. My problem under a lease is the fact that you don’t own anything when it’s over, so you’re stuck always having a payment. From a financial standpoint, it’s a complete disaster.

  25. Leasing is a terrible financial decision. Yes, you get a new car every 2-3 years but that doesn’t mean it’s a smart move from a financial perspective. You are paying a lot more for this convenience. For starters, be aware that you?re paying finance charges on both the depreciation and residual (the total of which is the negotiated selling price of the car). Remember, you?re tying up the leasing company?s money while you?re driving their car. They used their money to buy the car that you will drive while you lease. Technically, you?re paying finance charges on half of the depreciation (the average value) and all of the residual value for the term of the lease.

    To the commenter that is under her milage limits, if you drive less than the amount of miles allowed, you are losing out because the dealer gets the car back at the end of the lease with fewer miles than allotted that you have already paid for. You aren’t coming out ahead in this scenario, you are giving them free money!

    If you drive more than the miles allowed, the milage overages are steep. A previous commenter was correct in stating that often, the dealer will tell you they will ‘pay the mileage’ charges if you enter into a new lease. All they are really doing is adding these fees into your next lease. Next time you are over your lease mileage, tell them your next car is going to be a purchase and see how likely they are to do this for you. There’s a good reason the dealers push leases – it is a losing deal for the consumer and a ‘win’ for them. Even if you tell dealers you want to purchase, they will often ask you if you’ve considered leasing.

    Leasing gives no tax advantages over financing unless the leased car is paid for by the business and used 100% for business (expensed). If you use your leased car less than 100% for business use, you can only deduct the mileage/charges applicable to the business use, not the entire payment. So, Comcast can lease their service trucks and deduct the full cost of this expense whereas Joe Salesperson cannot unless he leases a separate vehicle that is only used for his sales calls. And, business mileage deductions are not restricted only to people who lease. Someone who finances a car can deduct business mileage too.

    The New York Times recently broke down the lease vs buy calculation and they found that even buying new beats leasing, but buying used is still the best bang for your buck.


  26. Hi Steve – Your comment reads like you have knowledge of car leasing from the inside. I agree with all of it. What concerns me is that there seems to be a new wave of more aggressive leasing, based on what look to me to be unrealistically low rates. I’m guessing those are come on rates, like $159/month for 30 months, with a $995 cap cost reduction. There has to be a profit driven reason for dealers to lure people in with those low rate deals. Then maybe this will look like the student loan fiasco in two or three years!

  27. I saved 10,000 dollars in a box, at home, working for cash for a while on a side job. Went to a Honda dealer and put 9995.00 down on a new civic that listed for about twenty grand. Drove away in my new car with a 200 a month payment for 54 mos. Best car deal I ever made in my life.

  28. Hi David – Buying is almost always better than leasing, and you managed to set up a package that’s very affordable. If you have to take a loan, make the biggest down payment you can and keep the payment low. You’ve done exactly that. I think that’s the way to get a new car.

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