Wednesday, August 23, 2006

3 common holes-in-logic surrounding lease vs. buy

Leasing is big business these days - partially due to the "monthly mentality" that a lot of bloggers, and Laura Rowley, have been talking about. Yes, the monthly payments are lower, but like an option ARM, it's just looking for a different kind of trouble to get yourself into.

1. If you lease, you have to go out and get ANOTHER car at the end of the term.

Continual leasing basically means you are going to be paying for one car or another for the rest of your driving days. You never get to stop making payments. However, if you buy a car and hold onto it for even six years, two years more than a lease, that's two years you DON'T have to make payments. Yes, the payments are lower, but you make them forever.

2. When you buy a car, the car is still worth money after it's paid off.

Let's use a brand new Saturn Ion as an example. The version I'd want costs about $17,500. Over the course of four years, you pay about $12,800 if you lease it. You pay about $19,000 to finance it at 2.9% (their current deal) over 4 years. So if you buy, you have paid out about $6,200 MORE over the 4 years for this car than if you leased. But the crucial thing that most people forget when they do these calculations is that you could SELL the car at the end and still come out ahead. Looking at cars.com, it seems that you could get at least $10,000 for a 2003 Saturn Ion with similar details. So even if you bought the car and paid these higher payments for four years, you would be $3,800 richer after selling it at the end than if you had leased it.

3. I won't have to pay for maintenance on a leased car.

This is a good gig for the company you bought the car from because new cars don't usually get the expensive problems in the first four years, which is when you have it. If the car is a complete failure, they usually have to replace it anyway under many states' lemon laws. And lots of companies are coming out with good warranties on new bought cars, or will sell you one for an amount small enough that you would still come out ahead buying.

But consider also what a car company is willing to fix for free in a leased car. Or rather, what they won't. Lease contracts usually stipulate that they are only going to pay for things that go wrong in normal use. So you can't go offroading in your Saturn Ion, tear out the undercarriage, and have it towed in to be fixed for free. Also, if you do damage to the car, such as dings or paint scrapes, they will charge you an arm and a leg when you bring the car back in. Same if you go over your mileage or otherwise rough up the car. The dealer wants to recapture that $3,800 by selling the car used, so they don't want to have to fix it up too much to look good. If they do need to do work on it, they are going to be mad, and they will take out their anger on you by billing you a crapload of money for tiny dents. Even for normal repairs, the dealership will frequently try to make as much of it your fault and not "normal wear and tear" as much as possible at the end of the lease.

2 comments:

prlinkbiz said...

Good post- Leasing a car is like throwing away money. You walk away with nothing. I am also against financing vehicles, but at least you own something at the end of your long-paying-too-much-for-something-
you-can't-turn-around-and-sell-for-more term. While short term leasing may seem appealing, drive a nicer car, better fit for a monthly budget or whatever, it is not a wise long term financial decision (there are very few instances where it is a good one at all).

Bob said...

Leasing IS throwing money away. People need to get over the desire for that new car smell and use a little common sense. Buy a three year old Honda for less that half the cost of new and don't worry about repair bills. It will run for years with only routine maintenance. Then take your $600 car payment and save/invest it. Use it to pay cash for your next car.