Leasing a Car

A lot of people have this notion that leasing a car is just A Bad Idea, because at the end of the lease, you "have nothing" since you give the car back. They seem to have been programmed to believe this, without ever having actually thought about whether it’s true. It’s not true.

Lease payments are much lower than finance payments; leasing is sometimes referred to as "paying for only what you use" of the car, whereas when you make finance payments, you’re paying for the entire price of the car.

It only takes 3 seconds to explain why it’s a lie that the leaser "has nothing" at the end of the lease. Watch.

Two people each have $20,000 and have their eye on the same $20,000 car. The first guy leases the car for 4 years, and the sum of the lease payments and the down-payment is $12,000. The second guy finances the car for 4 years, and the sum of the finance payments and down-payment is $20,000 -- the full price of the car.

What do they each have at the end of 4 years? The first guy has $8000 in cash, and the second guy has a car that he hopes will be worth $8000 (but in practice it’s rarely ever worth that full amount).

Not only does the leaser have much more than "nothing," he usually has more than the guy who actually bought the car, because the vast majority of cars don’t hold their value very well over time.

Posted by Anthony on Jul 22, 2003 | 8 replies
Filed under: General

Comments:

01. Jul 22, 2003 at 3:16pm by Patrick Copland:

I have become quite a fan of your site. I visit often. FYI: bad news I just got about DHS (Dept. of Homeland Security) awarding a 90 million dollar contract with Microsoft for desktop and server licensing. What a step backward. I will be writing my congressman and senators on this major set back.

02. Jul 22, 2003 at 10:51pm by Anthony:

Hi Patrick, glad you like it... hang out and post stuff if ya like... and, you can post your own messages on the main page, instead of replying to another post, in case you didn’t know... just click the link in the title at the top, or scroll all the way to the bottom, and you’ll see the posting form.

That’s word on the bad news tip. It is a sad trend. I think a big part of the reason that public sector outfits choose MS instead of an open source alternative is that with MS, there’s someone to blame when something breaks. In the open source world, there’s probably a better chance of it being more secure, but when something breaks it’s not so easy to point the finger at someone and say "FIX IT!" What do you think?

03. Jul 23, 2003 at 9:57pm by steev:

i agree with your assessment anthony, however my question is, what happens when someone uses some flaw in windows (and it could happen in any, but is usually more publicized with MS OS’s) and, suddenly the Dept. of Homeland Security, is well, not as secure?

04. Jul 24, 2003 at 9:54am by Anthony:

That’s exactly the catch-22 that I was referring to.

An open-source OS tends to be more stable and secure (though not 100%, of course), but when something does go wrong, it’s not as easy to hold someone accountable and get it fixed "or else."

A closed-source OS (Microsoft) is historically less stable and secure; however when something goes wrong, it’s easy to know where to lay the blame, and who to call to fix it.

05. Jul 24, 2003 at 2:36pm by joel:

I see two problems with your leasing vs. financing breakdown. The first is on the financing side -- unless you score a 0% rate (which is less unlikely these days that it used to be, but only on certain makers) you’re actually paying more than the value of the car to finance it. Score one for leasing.

However, once the four years (sticking with your example) is up, what does the guy who leased do? Lease another one, and in another four years he’ll be up to $24,000, at which point he will once again be in need of a car. The guy who bought his car can keep driving it, now paid off, for at least another four years, and if he’s smart and bought a longer-lasting car, much longer than that. Granted, he’ll have occasional significant repairs along the way, but the cost of them won’t be more than a few of the other guy’s constant ongoing lease payments.

You can see which side I lean towards ;). Actually, to be honest, so far I’ve only gone used anyway, and from individuals rather than used car dealers. And I never worry about the resale value of my cars -- I drive them into the ground. But that’s me.

06. Jul 24, 2003 at 3:08pm by Anthony:

Ha! An on-topic reply!!

Well, I deliberately ignored the interest on the finance plan, for the sake of simplicity.

But regarding your second point, even on "longer-lasting" cars, things go wrong, and sometimes those things are big (transmission, head gasket, etc). It’s common for one or two or more such "big failures" to come up within just the first 8 years of a car’s life, and each one can easily set you back one or two thousand dollars.

Then there are the smaller but more frequent "cheap" repairs, which might cost you just $50 or $100 or a couple hundred dollars. These of course become more frequent as a car gets older.

The bottom line is that you don’t stop putting money into the car once your finance payments stop. This is another fact that most people ignore when claiming that leasing is inferior. When you add up the cost of the interest that you paid above the price of the car, plus the ongoing cost of upkeep, it’s a non-trivial amount of money. It’s usually not as much as the sum of the monthly lease payments, but when you remember that the leaser still has that $8000 in his pocket, it is indeed comparable.

In my opinion, it’s definitely worth the slightly higher cost to have the peace of mind of driving a car that’s new, and just works, and that I don’t have to worry about anything breaking on. I’m not willing to deal with the hassle of car troubles, nor with putting my time into working on a car, when I have another alternative. My first car was a used car, and I put $3000 into it over the course of 3 years, and what did I have to show for it? A crappy Ford Escort. Never again. It is completely absurd to me to put that much money into a car that doesn’t look good, doesn’t run good, and that you’re constantly waiting for the next thing to fail on.

But of course, that’s just me, and people who like working on cars will certainly disagree.

07. Jul 24, 2003 at 4:40pm by joel:

"A crappy Ford Escort."

There’s your first problem ;). I generally try to stick with Hondas and Toyotas, even though I’d normally prefer to buy American, simply because their repair histories (as shown by the Consumer Reports annual book) are phenomenal compared to anything Detroit’s been able to put out.

So, as with all things, it’s never going to be a black-and-white case where one is better than the other. It depends far too much on personal preference :).

08. Jul 27, 2003 at 5:03pm by Mark:

When I do the math on car buying, the killer factor is always depreciation. In your $20,000 purchasing scenario at the top of the thread, the (hypothetical) buyer throws away $3000 a year in depreciation alone.

I’ve been driving for fourteen years. I’ve never spent more than $1500 on a car. Most have served me well for three years and in no single year have I wasted more than $500 on depreciation and maintenance combined. And they’ve barely ever let me down. The knack is buying the right car - I\ve had Saabs, Mercedes, and Honda-engined vehicles and they’ve all been great.

By retirement, I’ll have saved at least the cost of my house compared to someone who buys, leases or rents a new car! Do the math . . .

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