In return, they let you use it — but it’s still their car
In our minds we tend to think “lease” and “rent” are the same, but with cars they’re not.
You can rent a car for a weekend trip and be responsible only for the required insurance, gas and parking fees. The car rental company is responsible for all the other ownership expenses.
When you lease, you’re responsible for everything, but you have none of the advantages of owning the car (except driving it, but that’s limited).
I remember discussing car leasing with my uncle over 25 years ago. He pointed out that dealers love it. “And if it’s good for the dealer, it’s bad for you.”
That may not apply to everybody in every situation, but don’t fall into the trap of believing leasing is just another way of paying for a car.
When you buy a car, you have equity in an asset. It is a depreciating asset, for sure. That is, its value goes down with the passage of time. You will never get a 100% return on what you pay for it.
That depreciation is one of the expenses of owning a car. Others include buying gas, insurance, license plates and replacing wornout tires. The leasing company pays for some of the maintenance, but — unlike a rented car — some things are your responsibility.
Your lease payments will likely be less than loan payments, and they won’t buy you any equity. They reimburse the leasing company for the estimated cost of depreciation plus guarantee themselves a profit.
Also, you pay the cost of capital. That’s to compensate the car company for the interest you do NOT pay them, as you do when you buy a car and finance it through their financial auto loan company. This cost of capital is, in effect, an interest rate. But because it’s not technically an interest rate, it doesn’t have to be disclosed to you. According to Dave Ramsey, it’s effectively around 14% — pretty ugly when certificates of deposit are more like one-quarter of one percent.
And, although you do get to use the car, there are mileage restrictions. If you plan to take a lot of auto trips to see the country, you must buy.
Everything you pay for a leased car is an expense. That’s because you never really have any equity in it. At the end of the lease, you can buy it, but that buyback price is what the leasing company estimated it would be worth after three years of depreciation.
(The buyback price is in the initial contract, so it’s an estimate that may change in the next three years.)
So, depreciation is still a major expense.
If you don’t treat your cars well, when you return a leased car you face additional expenses for what they’ll say is excess wear and tear.
If you’ve exceeded the annual mileage limits, that also costs you additional money when you turn it in. You may have to pay $0.15 or even $0.25 per extra mile.
One Advantage to Buying Back Your Leased Vehicle
You know it well. That gives you an advantage over buying any other used car.
Going From Lessor to Buyer is a Hassle
You will have to get the car titled in your name. Remember: while you’re leasing, it’s not your car. You feel like the owner because you put the key into the ignition and drive it, but, legally, it’s not your car.
You will also need to register new license plates in your name.
Many states tax vehicles. So when you buy a leased car you’ll have to notify them you now own the car instead of the XYZ Leasing Company.
Moving to a New State is a Hassle
And some lease agreements don’t even allow you to move. Why would you sign THAT contract?
If you move to another state, you will not only have to notify the leasing company, but obtain a power of attorney from them and the leasing agreement.
The new state will quite likely require that to register new plates — which are for the leasing company, remember — because it’s their car, NOT yours.
Holding Cars for a Long Time is the Best Financial Strategy
The longer you own a car, the better from a strictly financial point of view.
The longer you own it, the more it depreciates, but if you take good care of it, it will likely continue to serve you well.
Modern cars are built to last much longer than cars were in the old days. I remember when it was unusual to see a car more than ten years old or over 100,000 miles.
Today, there’re many such cars on the road, of all makes.
What If You Want a New Car Every Three Years?
In other words, you don’t care about saving money. You want the top dog feeling of driving a new car.
So you can lease a new car every three years.
Then, it’s debatable whether buying would be better.
If you buy a new car, make payments for three years and then trade it in on a new car — you still have equity, which can be traded in to reduce the price you pay for the new car.
But, in both scenarios, you must understand you’re giving away a financial edge.
A brand new car depreciates the most, the fastest.
On average, cars depreciate 60–70% in the first four years.
The Financially Winning Strategy
In general, the most financially efficient way to buy a car is to buy a used one that’s only a few years old.
You have the advantage of depreciation already having taken a big chunk off the market price — but, assuming it’s been well-cared for and hasn’t been in any accidents, it is still a modern car with modern technology and still in excellent shape.
With many more miles to roll before it has to be junked.