I've always been against leasing cars because it's like renting a car for several years, paying a bunch of money for the privilege… and then having to return it with nothing to show for your money. I've lectured and droned about leasing before, but recently I heard some fresh arguments against leasing that got me all fired up again.
Barbara Terry, an off-road race car driver and author of the new book How Athletes Roll, about what types of cars big-name athletes drive, makes some old and some new arguments against leasing. Terry says:
• Those who opt to lease their vehicle will end up paying thousands of dollars more over a five year period than those who purchase, even if leasing costs less initially.
• When you buy a vehicle, you have something to show for all those payments you made, when the vehicle is paid off.
• Even better, once the vehicle is paid off, you can keep it and be payment-free for a while. So much healthier than being on an endless treadmill of car payments –the second biggest expenditure in most American's budgets.
• Or you can choose to buy another vehicle and use the one you now own as your down payment (otherwise known as a trade in.)
• When you buy rather than lease, you can choose to buy used, which brings you even bigger savings. This is, perhaps, the best point of all. I argued for buying used rather than new in this column a few weeks ago.
• If you buy a car rather than leasing, your insurance premiums are usually lower.
• When you lease a car, there's usually a mileage cap. So after you hit that cap, you have to pay fees of as much as $0.12 to $0.15 per mile.
So that's where Terry and I come down on the question of leasing versus buying. But if you're going to defy us and lease a car anyway, here's some critical advice: negotiate the price of the vehicle just as you would with a purchase and THEN reveal that you want to lease it. The monthly lease payment is then based on this price. It's not some random number the dealer dreams up! Most people just go with the dealer's price when they lease. If you hate haggling, the fact that you can do a better deal may not be welcome news. But think of it this way: you could end up paying less than the $299 a month advertised on TV.
Monthly lease payments are calculated lots of different ways, but here's a simplified formula: You take the car's purchase price, minus what it will be worth at the end of the lease and divide by the number of months. Now here's more leasing lingo you'll need to know if you're going to "disobey" me!
1) Up front costs: Lease deals don't include anything called a down payment. Instead it has the catchy name "capitalized cost reduction" --either cash or a trade-in. There are also other up-front costs like first and last month's payment and a security deposit.
2) Monthly costs: Lease payments are usually lower than purchase payments because you only have to pay for the "part" of the car that you "use" during the years of the lease. You will also have to pay something called the "rent charge, " "lease charge" or "money factor." This is similar to an interest rate when you're financing a car.
3) Maintenance costs: Keep in mind, you are responsible for maintaining and repairing the car, even though after two to five years it won't be yours anymore. Some lease deals include maintenance, but may charge you a "deductible" each time you go to the shop.
4) Penalties: You may have to pay fines for moving away from the area where you leased the car or turning the car in early, among others.
5) End of lease costs: Many leases contain yearly mileage caps of 12,000-15,000. Exceed the cap and you could be forced to pay up to 25-cents a mile for every extra mile you've traveled. You may also owe for extra wear and tear to the vehicle. If you want to buy the car at the end of the lease, you'll have to pay for the car and pay a fee for that privilege. Well, isn't that special? If you don't want to buy the car, you may have to pay a "vehicle disposition charge" for the dealer to prepare your car for sale.