Broker Check

Does It Ever Make Sense To Lease A Car?

July 06, 2017
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I have many pet peeves. As a matter of fact, I used to have a blog where each week I dedicated 2,000 words or more to venting about things that annoyed me. To put it mildly, I'm easily annoyed by the smallest of things. The most recent issue to catch my ire was a financial advice show (I won't say which one). The host of this particular show was giving advice to callers when a young woman called in with a question about cars. Essentially, the woman wanted to know if it was ever appropriate to lease a car. The host responded by saying that there is no scenario where it is EVER appropriate to lease a car. EVER!

Now back to my pet peeves: one thing I hate is when people treat an opinion as if it is fact. There are plenty facts in finances. If you have $2 and I give you $2, you now have $4. That is a fact. The term IRA stands for Individual Retirement Account. That is a fact. But with the millions of people in this world who need cars to get to and fro, how could you say with certainty that it is NEVER appropriate to sign a lease?! It just didn't sit right with me. So I decided to take some time and go through a few scenarios where it MIGHT be appropriate to lease a car. Again, this is my opinion, not fact. But at least I know the difference!

You Can't Afford Repairs

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It is very possible that the costs of buying a car outright or financing a car could be more cost-effective than the payments to lease that same car. And when many people compare the pros and cons of leasing versus buying, the payments are all they consider. But in order to truly understand the costs of owning a car, you have to take into consideration the costs of repairs and upkeep as well. If you have never bought a lemon, let me tell you from experience: it is no fun to look up at the end of a few years and realize you've paid more to fix the car than you did to buy the car. If you've bought a car that's not under warranty, it is your depreciating asset. This distinction means that not only is it your responsibility to fix everything that's wrong with the car, but you're paying for repairs on an asset that likely decreases in value each year. If you're in the market to own a car, you have to do your due diligence to make sure that car is in great shape. And while there is still research needed when leasing a car, a number of things that could go wrong are likely to be covered by the dealer. Remember, when you sign a lease it is not your car, but the dealer's car. If something goes wrong that's not a result of your negligence, the dealer is on the hook to make the repairs. If you're in a situation where money is tight and you need everything to go well, leasing may be an option that takes away some of the risk of potential repair and upkeep costs. For a number of the students we work with who use student loans for 100% of their living expenses, they don't want any unexpected costs in their budget. If something pops up, they only have loan money to address the issue. Leasing a car with strong protections for these expenses might be a better option than buying a car. After all, the only thing more annoying than using a student loan to pay a car loan, is using student loans to pay for car repairs!

You're Indecisive

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In a perfect world, you would decide on a car and drive it for 1 million miles. But not all of life's situations allow you to know how long you'll keep a car. Are you newly married and all you can afford right now is a small, two-door coupe? If you're planning on having a child in the next year or so, do you think it's likely that coupe fits your lifestyle when the little one arrives? Maybe you're moving to a new city and haven't decided whether or not you'll even need a car. Or you're a Toyota man who is considering a switch to Honda, but you want to test it out first. I don't know all of the scenarios, but the point is there ARE scenarios where locking yourself into a vehicle isn't ideal. Many people would argue that leasing a car adds money to your budget that doesn't bring value, and on paper they would be right. But there is something to be said for maintaining flexibility, and a lease can offer more flexibility than owning a vehicle. Regarding its impact on your budget, no debt or expense should be added to a budget before you've built in your savings and your retirement goals. After you've done so however, it isn't the end of the world to add a "needless" expense, as long as it doesn't prevent you from contributing to your priorities. So if you don't want to be tied to a car, for whatever reason, look at the impact a lease would have on your budget. If you can meet all of the benchmarks you desire and still afford a lease payment, do it with a clear conscience.

You're The Boss

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Are you a small business owner? If so, you know that it's not always possible to take a chunk of cash and buy something outright. It's highly likely that you need financing, and the current tax laws provide business owners with some incentives for leasing vehicles. If you can prove that your car is being used for business purposes at least 50% of the time, you could be eligible to receive certain tax deductions based on your lease payments. Some of the tax benefits related to owning a business vehicle aren't available when you lease, but others, such as the business mileage deduction, are still available. It's also important for a business owner to research whether to do an open lease or a closed lease, which has different impacts on the taxes of the business owner. Open leases are typically shorter term, but also potentially expose the business owner to increased costs at the end of agreement. Some of these costs could be tax-deductible. Closed leases are typically for a longer term, but minimize the amount you would have to pay to walk away at the end of the deal. If this option seems to be a fit for you, meet with your CPA or tax professional to explain your situation and ask for their advice on the best route for your business.

You Don't Take Road Trips

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One could argue that people in this category are also candidates for buying a cheap "clunker" car that exists simply to get you from Point A to Point B. A good friend of mine is the master of finding a car for less than $1,000 that will do the job of getting through the 15 mile round trip he takes for medical school each day. If you're in school, professional residency, the military, or even live really close to where you work, it's unlikely you log a ton of miles on your car. And if you're not as knowledgeable about cars as my friend, trying to find a CraigsList steal might be a big risk. Leasing a car could be an option that fits your lifestyle. Many leases have mileage limits which restrict the amount of miles you can drive the car in a given year, and even penalize you for going over. That penalty could be a deterrent for road trip warriors who like to hop in the car and drive a couple states over to see a friend or attend a wedding. But if your car needs are relatively low, an affordable lease shouldn't be excluded from your list of options.

You Have Good Credit and Other Financial Priorities

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This one isn't just for people interested in leasing cars, but also for people considering taking out a loan for a car they want to buy. If you're under the age of 45, it's likely that your parents or grandparents told you to never finance a car: always buy it in cash. I'm not here to say that advice is wrong, but I will say it is certainly outdated. If you've followed any of my previous posts or videos, you've probably heard me say that nothing in your financial life happens in a vacuum. What I mean by that is just because something makes sense regarding one element of your finances, that decision will inevitably affect other parts of your finances as well. Of COURSE it makes sense to buy a car outright and not pay any interest to a lender. But if you're planning to take a big chunk of cash out of savings to buy that car, there are a number of other things to consider. How does this affect my emergency fund? Will I have enough left in cash to cover unexpected expenses? How will paying this much in cash right now affect my other financial goals? Do I have any other upcoming purchases where this money could be needed, such as buying a home or paying for a child's schooling? I'll say this again: cars typically lose value over time. While not guaranteed, homes are statistically more likely than cars to appreciate over time. If you're going to put a lump sum of cash towards a purchase, do you want it to be for something that will lose value? If you have stellar credit, it's also likely that you receive a favorable payment, which could mean more money in your pocket to invest. This is an important consideration, because if you pay in cash you are missing out on any interest that money could have earned. For example, let's say it's the beginning of 2009 and you saved $20,000. With that $20,000, you were trying to decide between buying a car, or investing it in the S&P 500 (The S&P 500 is an index that tracks the 500 largest companies listed on the Nasdaq and New York Stock Exchange). You choose to buy the car, giving up your $20,000. In 2009 the S&P 500 rose more than 20%, meaning you missed out on over $4,000 in interest in that one year alone! The more expensive your car, the higher this "opportunity cost" of paying cash grows. In my opinion, large lump-sum purchases should be reserved for A.) needs or  B.)things that have the potential to ADD value to your finances. And I hate to break it to you, but an expensive car is not a need. Even if you are being reasonable when deciding how much to pay for a car, the old edict - that buying your car in cash saves money - must be updated. A better statement would be that buying a car in cash saves money on the car, but might cost you money elsewhere! 

If you've gone through a responsible thought process in the past and decided to lease a car, I hope you appreciate my sticking up for you today. And if you are currently deciding on whether or not to buy a car, please understand that there are a number of great pros for purchasing that car. But if you look at your cons list and it seems a little longer, I hope this list gave you some ideas on whether or not a lease is worth considering. Until next time!