This is an interesting topic, because there are positives and negatives to both. For example, you will likely have few or no major repairs when you lease a new vehicle every three years. That is a good thing. If you are into status, you will have the newest and shiniest car on the block all the time. Interestingly, your monthly payments will likely be less on a lease than if you actually made an outright purchase of the vehicle with an auto loan.
However, purchasing a vehicle also has its advantages. The first is you own the vehicle. It is an asset of yours that you are free to sell at any time, assuming you use the proceeds to pay off your loan first to obtain the title. Some of the amount of the monthly payment, assuming you have a loan, goes towards principal, building an owned asset.
On the other hand, the car is depreciating, getting old, getting used, and therefore there are downside impacts to owning a vehicle. For one, depending on how long you own it and how many miles you put on it, you may have major repair costs along the way.
On the other hand, there are risks to leasing a vehicle. You may have gone over the mileage allotment, which would cost you hard cash above and beyond your monthly lease payment to return the vehicle at lease end. Trust me, the leasing company does not want the car back, so they are going to make it as hard as possible for you to return it. I’ll get into that in a minute, because you can use that to your advantage.
I once leased a vehicle because I moved to New Hampshire and needed a four-wheel-drive vehicle. I wanted the least expensive vehicle I could find and wanted the lease payments to be very low.
Now everyone knows that you get what you pay for, but I was determined to keep the monthly lease payments low. So I bargained, I negotiated, begged, borrowed, and lambasted the dealer into giving me a “great” deal, which for me was a low monthly payment.
In leasing, there are many ways a dealer can make money. For one, you cannot negotiate the monthly payment and the cost of the vehicle. You can negotiate one or the other, not both. You can try, but I guarantee you will have varying levels of success.
The dealer can play with the “interest rate,” which believe me is imbedded in the contract someplace. He can adjust the amount of miles in the contract. If you request less miles, your monthly payment will go down. He can adjust the lease term, the length of time you need to make payments under the lease before you return the car. He can adjust the residual value of the vehicle at lease end, which is the amount you can purchase the car for, assuming you want to purchase it at lease end. Last but certainly not least, he can adjust the purchase price, which becomes the basis for all other components of the lease.
Keep in mind that you have an obligation under any lease to maintain the vehicle in proper running order. So the dealers have a twist to make sure you do that. If the standard warranty on the vehicle is 36 months, for example, they will make sure the lease term is at least 39 months. Why do they do that? Well, if you run the vehicle into the ground, it will be out of warranty before you return it, and therefore you will be responsible to make any major repairs before you return it. As I’ve said before, you simply can’t make this stuff up.
Well anyway, I leased this four-wheel-drive vehicle for a great monthly payment amount, just over $200 per month. The SUV probably “cost” more than it was worth, $26,000, and had a residual at lease end of $15,000. It was a 39-month lease, wouldn’t you think, with a 36-month warranty?
Oh, and one more thing. They normally charge you for an average of 15,000 miles a year in the lease. Anything above that, you need to pay .25 per mile extra, or something like that. In my ultimate wisdom and drive to get the lowest monthly payment possible, I negotiated the mileage down to 12,000 miles per year. The dealer agreed, we signed, and off I went with my brand new SUV.
Now I should have suspected something when, with 60 miles on the vehicle, a car in front of me picked up a rock on the highway and the windshield began a hairline crack that ultimately consumed the entire windshield.
Well, to shorten this story as much as possible, the SUV was a piece of crap. Things that weren’t covered under warranty, like brakes, tires, the windshield, etc., were breaking right and left. There was a roof rack on the vehicle, and putting something up there one day it actually dented the roof because it was so flimsy a feather could have dented it. Finally, it did get used on long highway trips, so by lease end I was 10,000 miles over the lease contract. It was a disaster in the making.
When it came time for me to decide if I was going to buy it or return it, there wasn’t a chance in hell that I was going to buy it. As a matter of fact, the book value of the vehicle at that point was $10,500 and the lease residual purchase price was $15,000. Do they think I’m crazy? I’m trying to lose all debt!!
So, as I alluded to before, the leasing company does not want the car back. They have to pick it up, store it, and likely ship it overseas to find a market. They want you to buy it; it’s less trouble for them. Oh, and they have the ultimate authority to re-negotiate the residual amount. Can you believe that?
They made enough money on you over the course of the lease to actually reduce the end payment, should you decide to keep the car. So we negotiated, not that I wanted to buy it. It started at $14,000, $13, $12, $11, even below market value $10,000 if I would simply take it off their hands. Not interested.
Before returning it, I had to replace the brakes, tires, windshield, and spruce it up a bit. When they came to pick it up, I had to pay $500 for the dent in the roof and $2,500 for the excess mileage just to return it. What a bad decision. Don’t do it. Leases are almost always more expensive in the long run.
For my next SUV I did an out and out purchase, with a loan. I still own it now, it’s 10 years old with 120,000 miles on it, and it’s still worth $5,300 retail. It only had two major repairs, a wiring harness and a transmission, both covered under warranty (six years). So I got 10 years usage, 120,000 miles, the loan was paid off in five years and I own the vehicle.
Now I agree that the monthly payments were more than if it was a lease and I am not driving around in a flashy new car, but then, I’m totally without debt!!
Buy, don’t lease.