Leasing
Makes sense if: Downsides:
| You need / want a new car every 2-3 years | Higher long term cost of ownership |
| You drive 12,000 miles or less | Limits on mileage / excess mileage penalty |
| You need / Want lowest monthly payment | Less flexibility in terms of when your replace car |
| You do not want to maintain an older car | You always have a car payment, never paid off |
| Business expense calculation is simpler | Possible surprise “wear and tear” fees when you return the car |
| Higher insurance limits required |
Leasing always provides a lower monthly payment. However, over the long run the total cost of ownership is definitely higher. This is because when you lease, you never own your car, thereby assuring that you will always have a car payment. In addition, there are lots of potential "got ya" fees when you return the car. The monthly lease payment is typically 30-50% lower than financing a purchase, even if you get 0% financing. This encourages people to lease luxury cars that they otherwise could not afford. There is a reason that they are called "luxury" cars. They are for people who do not have any financial pressures and can afford the "luxury". If you have to finance luxury then you really can't afford it. The principles of good financial planning dictate that luxury vehicles should be driven by people who have already funded such things as retirement savings, emergency funds, college funds, etc.
Here are a few things to consider: First, how many miles do you intend to drive yearly? If it's 12,000 or less, leasing is an option. Most leases are designed for 12,000 miles or less. You can set a higher mileage limitation if you are willing to accept a higher lease payment. High mileage drivers are usually better served by purchasing their vehicles. If you exceed the mileage limitation stated in your lease, the penalty is typically 15 to 25 cents per mile. Therefore, if you drive an extra 3,000 miles per year over your limit, you will pay an additional $ 450 to $ 750 per year when you trade the car in.
Second, if you use the car mainly for business purposes, want the lowest monthly payment and like having a new car every 2 to 3 years, leasing may be the way to go.
Third, do you want your mid-life sports car NOW? Most banks won’t lend more than $ 30,000 on an auto loan, so leasing may be your only option.
There are a number of other issues to consider when leasing. For example, insurers usually require higher insurance limits for leased vehicles. There are two types of auto leases: closed end (you turn the car in to the dealer at the end of the lease and owe no more except for excess mileage or unusual wear and tear) and open end (you must buy the car at the end of the lease for a predetermined amount—also known as an equity lease).
And, no matter what the dealer tells you, leases ARE negotiable. The amount for which you lease is the difference between the purchase price of the car and its residual value at the end of the lease period. Your lease payments are made of up of the depreciation amount plus finance charges. A devious dealer may try to shift more of the depreciation cost to you by placing an unfairly low residual value on the car.
If you lease a car and wish to get out before the lease's expiration, you're stuck unless you can find someone to take it over. You might try posting the car on the website www.leasetrader.com . They charge $ 80 to list your vehicle and $ 150 to complete the transfer of the lease. You can also learn more about leasing and compare lease payments at www.leasecompare.com
Many business owners say that they like to lease their cars because they can write off the lease payments. That is an oversimplification of the tax issue. Business owners can write off the business use of their vehicle regardless of whether they lease or buy. For example, a business owner can write off 60% of all the costs of operating the vehicle if 60% of the miles driven are for business purposes. This means that 60% of the gas, maintenance, repairs and lease payments are business expenses which reduce the business’ taxable income. If the business owner purchased the vehicle, they get all the same write offs except that instead of taking 60% of the lease payments, they take a percentage of the purchase price each year as specified in the IRS depreciation schedule.
Buying
Makes sense if: Downsides:
| You want the lowest long term cost of ownership | Higher monthly payment until car is paid off |
| You want no mileage limitations and plan to drive more than 12,000 miles / year | Need to keep car longer than 2-3 years to make sense |
| Higher initial payment may lead to more sensible choice of vehicle (not buying more car than you can afford) | Business expense calculation for taxes is slightly more complicated |
| You can build equity and eliminate car payments | May owe more than car is worth in early years |
| You do not want to expose yourself to surprise "wear and tear" fees | You are responsible for resale or trade as opposed to turn in and walk away |
| You want complete flexibility re: timing of sale or trade in |
Buying a car is for those people who want no limits on their annual mileage, who can afford a higher monthly payment, intend to keep their cars for more than 3 years and need a car primarily for personal use.
In the long run, buying is less expensive than leasing; because once the car is paid off, you no longer have a car payment. Then you can take the money that you were using for your car payment and use it to fund your retirement, college funds, and any other worthy goal. You also have the freedom to sell your car or trade it in anytime, not just at a pre-determined lease expiration date. When you do sell it, the money you receive can provide the down payment for your next vehicle.
Monthly car payments (when you purchase) are comprised of interest and principal. A greater percentage is allocated to interest rather than principal in the early years, just like a mortgage. When you purchase your vehicle you can build equity. You may not build much equity, if any, in the first three years because cars depreciate quickly in the early years of their useful life. Therefore, the benefits of buying quickly disappear if you only plan to keep a car 2-3 years. The final benefit of buying rather than leasing is that there are no "got ya" charges for excessive mileage or wear and tear. These charges are always unplanned, can be substantial and often seem unreasonable.
Studies have shown that it's better for you to negotiate with car dealers at the end of the day, at the end of the month, on a weekday, a rainy day or during any other slow sales period. This holds just as true whether you are buying or leasing.
From a financial planning perspective, getting a new car every 2-3 years is very expensive. In order to build and preserve wealth, this financial planner typically recommends buying your cars and holding on to them for several years.
For More Information:
If you have questions or comments about this or other financial issues, please contact Jeremy Kisner, CFP at (702) 256-7400. Mr. Kisner is the President of Kisner & Associates, a fee based financial planning and wealth management firm with offices in Las Vegas, NV and Scottsdale, AZ. The firm advises mid to high net worth clients on a wide range of financial issues. In addition the firm manages investment portfolios for clients which range from $ 250,000 to more than $ 10 million. For more information visit: www.kisnerandassociates.com
