3 REASONS WHY YOU SHOULD NEVER LEASE A CAR

What? But a lease is so cheap. No, it is not. Do not be fooled by the supposed low monthly price. Let’s understand what a car lease really is.

1. A CAR LEASE IS A PERMANENT CAR PAYMENT.

You are paying to borrow a car. When you turn in one car and get another, you have a new lease. You never actually own anything. It is similar to renting – you will never get ahead.

I remember having a conversation with my brother when he leased a car about 10 years ago when lease became popular. I asked him why he leased a car.

His answer: “Because I got a car I couldn’t afford”.

The keys words here are couldn’t afford. If you can’t afford it, don’t buy it or lease it.

2. LEASING A CAR IS MORE EXPENSIVE THAN BUYING A CAR

“Oh no, that can’t be. I can get a truck for $69 a month. Yes, you can but you also have to put in the down payment of $3,500-$5,000 plus the penalty at the end of the lease for going over the mileage, any damages, etc.

If you buy a car and drive it for 10 years that is 4-5 years with no car payment. With the average car payment being around $500 per month or $6,000 per year, not having a payment for 4-5 years will be a savings of $24,000-$30,000.

My friend leased a Prius for 3 years at $300 per month and then went to buy it after the lease expired. Because the lease was discounted for 3 years to purchase the vehicle would have been $600 per month. Had she bought it outright, her payment for 5 years would have been much cheaper.

Let’s compare leasing versus purchasing for a 2017 Prius (which no in mid-2018 are on sale).

Item:                           Lease:                         Purchase:

Down payment          $1,999                       $1,999

Monthly payments    $3948 year 1             $4944             ($412/month)

Monthly payments    $3948 year 2             $4944

Mileage overage        $ 900 2 years             0                                 

Total:                          $10,795                      $11,887

 

Year 3 & 4                  $10,795                      $9,888

Year 5 & 6                  $10,795                      $4,944   (payments end year 5)

Year 7 & 8                  $10,795                                 0

Year 9 & 10               $10,795                                  0                                 

Grand Total                $53,975                      $26,719

*Assume lease payments increase every 2 years but that the repairs on the purchased auto equal that.

3. BUT MY CPA SAID IT WAS A BETTER TAX DEDUCTION

No, it is not. A business owner can deduct their vehicle used for business whether it is a purchase or a lease. You can choose the actual expenses or mileage for both leased and purchased vehicles.

Have a good conversation with your CPA about this. If you purchase a car you can choose whether or not to depreciate it. You cannot do this with a leased vehicle. This is where having a good CPA comes in handy.

Look at the numbers above. Even if you take the tax deduction, how much do you save? $53K versus $26K – the difference is $27,256 in costs savings. In the 25% tax bracket, the tax savings is $6,814. The $6,814 increase in tax savings does NOT make up for the $27,256 difference in money spent on the auto.

If these numbers don’t scare you, here is a great statistic for you.

94% OF RICH PEOPLE BUY THEIR CAR, ONLY 6% LEASE

Why? Because they learn how to spend money wisely. That is how they became rich in the first place. Most rich people in the USA started a business, worked their butts off and they know how hard it took them to earn the money so they make the most of it.

In the book “The Millionaire Next Door”, (written by Thomas J. Stanley and William D. Danko), the average millionaire in America drives a car made in the USA and drives it for 10 years on average.

Yes, you can go lease that shiny new bauble if you want but just remember: it comes at a steep price.

 

 * This post was originally published on the Crunch the Numbers.org website in 2017.