Don't Get Fleeced By a Lease

A new car is a vanity decision. Once you know that analyzing your options become a lot easier. 

A new car is a vanity decision. Once you know that analyzing your options become a lot easier. 

Materialism is one of those things that most of us don't want to think about because it has negative connotations. Let’s be serious here, who actually goes up to their friends and says they are a materialistic person. Ummm no one that I know! Whether it's a gadget, a brand you like wearing, we all have fallen prey to “stuff.” What is weird is we are told time and again that objects don't make us any happier, yet our brains keep playing the same trick on us to buy anyway. Let’s journey inside the human mind when making a decision about a car lease….

A Lease is a Vanity Driven Decision In Most Instances

The biggest mistake people make when leasing a car is not just that it is a bad financial decision, it is the fact they don’t admit that it is mainly driven by vanity. Leases for some are a way to buy a new car that they really “want” but can’t reasonably afford.  The first step to financial understanding is to admit that you are making a purchase out of weakness.

What to Do

One way to anchor your emotions is to run the numbers and understand what you are getting yourself into. Let’s look at an example of buying versus leasing over a six year period shall we? 

Tale of the Tape

Looking at a promotion on Edmunds.com I was able to find a 2017 Acura ILX for $199 a month, 36 month term, with 36k in miles. The catch on the deal is $4,199 due at signing. The total cost for three years comes to $11,363. Let’s assume you found a similar lease again for another three years. Your total cost comes to $22,726, or $3,788 a year for six years.

The same vehicle had an average sales price of $28,038 according to car pricing service TrueCar.com. If you put the same $4,199 down and financed the car for 60 months (5 years) at 4.0 percent, you would calculate a monthly payment of $439. Assuming a depreciation decline curve (30% of MSRP) after six years the residual value of the car comes out to $9,042.

How Did It Finish

The lease appears more attractive but the overriding factor is I own the asset at the end of the six year. After factoring in the sale of the vehicle, financing comes out ahead by $1,227 dollars.

The Takeaway

Although it appears financing and leasing are a wash in this example, remember  the lease was given every possible advantage. Based on pure numbers it is very hard to find scenarios where leasing wins. The main scenario does not factor in a better deal on financing or a terrible lease negotiation (hint, hint most people don’t get the optimal lease terms I described here). In other simulations, financing the car came out $6,000-$7,000 ahead on average over the same six year period.

One Man’s Viewpoint

I don’t believe in financing or leasing new cars. I actually would prefer to buy when the depreciation (the largest cost of a vehicle) is negligible. That usually means looking at cars that are 5-7 years old. Although you worry about breaks and repairs the numbers are compensating me for the risk I am taking on. Why save $6-7k when you can save $10k or more over the life of a car?

Just like buying a home, time horizon is possibly the most important factor

In a prior post I stated that duration is really the key determinant in home buying, and financing a car is no different. If you refuse to hold the car for the duration of the loan then the lease does become a bit more attractive.

Aaron, I am going to lease a new car anyway…

Sometimes in life, the best advice falls on deaf ears. If this is the case, you can read my article on considerations to consider when negotiating a lease. My thought is if you are going to make a bad decision you can at least make an educated one.

Car Purchase Series: This is one post in a series pertaining to the car buying experience. Stay Tuned!

Disclaimer: The article is not a recommendation of any financial products, it is merely for educational purposes.

More: Aaron Connell is a writer and Principal of One Brick Planning & Consulting, a Gen Y focused financial services practice.  Have a question for Aaron? Email him at pfinconsulting@gmail.com