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Lease A Car, Don’t Buy It!

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This is a Devil's Advocate post.

Buying a car, whether it’s new or used/certified pre-owned/whatever Orwellian double-speak you prefer, is better than leasing a car. When you lease a car, you’re throwing your money away! You’re overpaying in terms of fees, you don’t get any ownership in the car, and basically you’re renting.

All that is true. However, I argue, in this Devil’s Advocate post, that while you do pay a premium for leasing and while you don’t get to keep the car, that premium gets you a lot of benefits you either don’t get at all or that you’ll lose after a period of time when you buy the car. Also, one thing a lot of people don’t consider is the impact of depreciation. With leasing, you’re essentially paying for that depreciation (plus fees, etc.) because it represents the value that you’ve used up. With buying, you are paying for that depreciation but you get the car afterwards.

Automobile Equity Is A Myth
First off, I think the fact that you get your car after you pay off your loan is hugely overrated. People say that you should buy a car instead of leasing it because when you pay off the loan the car is yours. When you lease, you’re basically paying rent (you pay for the depreciation of the car) and you never actually own a piece of it. See how the analogies are so closely tied to home ownership? The problem is that cars depreciate, and depreciate extremely quickly, whereas homes appreciate. You want to own a home… it doesn’t really matter if you own your car because in ten years you’ll probably sell it for a couple hundred bucks or donate it. When you buy a car instead of leasing it, you’re still paying rent – it just takes the form of depreciation (value that you never recover) and just looks invisible to you (out of sight, out of mind). It’s something businesses fully understand (why do you think businesses lease equipment?) but something individuals don’t fully consider.

Taxes taxes taxes!
In Maryland, the sales tax is 5% – that means when you buy a $15,000 car, you need to send another $750 to the state just to register your car and get license plates. That tax is up front, even before you get to drive the car. With leasing, you will only pay taxes up front on the amount of the down payment (often little to no down payment is necessary for leases). Then, with each month’s payment you will be charged tax but ultimately, with leasing, you are only charged taxes on the fraction of the car that you’re using during your leasing period. You don’t pay tax on all $15,000 of car.

Cars are Always New and In-Warranty
I put these two together because they’re related and they focus in on the same reason – when you lease a car, you’re getting a new car. You’re getting a car that has on accident history, it doesn’t have weird noises or other strange quirky behavior. Also, when you lease a new car, it will probably be covered by the original manufacturer’s warranty for the length of your lease. That means if something happens, the repairs are absolutely free. While this is true of new cars that you purchase, that warranty will eventually run out and then you’re stuck with the repairs. If you continue to lease, you’re always getting yourself a new car and you’re always in warranty.

Ultimately, the choice of whether to buy or lease depends on each individual’s personal factors but just like the Buy, Don’t Rent post, one cannot universally say that everyone should buy a car and not lease it. As you can see, with this inclusion as a Devil’s Advocate post, I am a proponent of buying a car because there are a lot of benefits to doing that – mainly, that little bit (dollar-wise) of ownership that you get after you pay off the car can last a very very long time, especially if you’re smart about maintenance.

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17 Responses to “Lease A Car, Don’t Buy It!”

  1. Chris Hynes says:

    Are you sure a leasee only pays tax on the downpayment up front? I don’t have a link specifically but I have talked with several friends that leased, and they had to pay taxes on the fair market value of the car up front. Perhaps it is a state to state thing, as they are in Virginia.

  2. jim says:

    Different states do handle leases differently but I don’t think any of them require that you pay taxes on the fair market value of the car, the most they will make you pay is tax on the capital depreciation of the car over the period of your lease in front instead of spreading it across your monthly payments.

  3. Omar says:

    For some people there is another incentive to leasing a car: it counts as a business expense tax deduction. That makes the annual cost of leasing a car even cheaper than buying a car. If you can actually claim the deduction and you prefer to change your car every 3 or 4 years, it makes sense to lease. If you’re one of those people who takes really good care of their cars and drive them into the ground, then buying makes a lot more sense.

  4. Foobarista says:

    You can still write off a car as a business expense if you buy it; the loan interest (if applicable) is deductible in this case, and the car can be depreciated, repairs deducted, etc. If you’re a new car fanatic, buy American cars*, and use the car in business, leasing may work out, but otherwise it typically won’t.

    (*Hondas and Toyotas have a more “linear” depreciation curve when compared to GM and Ford, which are steeply front-loaded.)

  5. InsultComicDog says:

    I advocate buying used cars (3-4 years old) and driving them for several years. A 17K used car is a lot nicer than a 17K new car and if you get a good model in good shape it’s almost like new. For example I bought a 1998 Toyota Avalon in January 2002. Five years later, I have no plans to replace it any time soon. Still looks and runs great. Little annoyances here and there, but definitely worth putting up with! And I paid mostly cash for it.

    Before that car I had a 1989 Acura Integra that I bought in 1992.

  6. NewGirl says:

    Interesting post! I have been thinking of doing a post on a similar topic (new vs used) because the car that I’m thinking of buying, a Toyota Prius, doesn’t seem to depreciate as much in the first few years as other cars. I don’t know if that’s because they haven’t been making them for very long, or what. But it changes the calculations some for me. I tend to drive my cars into the ground, so the things I look for are long lasting, and don’t break down much. My favorite so far was a 10-year-old Honda Accord with a pretty much perfect record.

  7. Melisa says:

    I leased a car for the 1st time this weekend. I have always been against leases b/c of the negative stories I have heard about owing money after your lease is up regardless if you have gone over your mileage requirements. I leased a 2007 Prius through toyota b/c this lease sounded very different from other leases I have read about in the past. Any comments or experienc with leasing a car through toyota recently?

  8. Peter says:

    Does anyone know how a lease effects credit record. I am in the process of buying my first home; one friend told me certain leases are not considered on credit report but a car loan would. In other words if I take a loan for a car the credit bureua sees me as spending $300 on payment, conversely if I lease the car that payment does not appear. Therefore it looks like I have more cash to spend on my house each month. Any thoughts?

  9. broknowrchlat says:

    I just revisited your Devil’s Advocate series after writing one of my own. My father in law leases cars a lot. But, he likes to get a new car every 2 years anyway (which is insane). I think if you do that, it does work out to be to your benefit to lease. Reviewing the recent lease offers leaves me wanting to cringe. Cars listed as a steal with $3995 due at signing + $500 “bank fee and another $500 worth of ridiculous fees. Then the monthly payment is $399 a month for 27 months. So, my handy dandy calculator says that averages to just over $7000 a year. Then, you get to pay $0.20 a mile if you drive over 10k miles a year (doesn’t everyone). That’s ridiculous. Leasing cars (or buying new and selling quickly) has to be one of the worst financial moves you can make.

  10. Brett Carlson says:

    I worked out the math on a 2007 a4 Audi. Now my assumption is lease vs. buy numbers. On the buy side, I would be looking at a finance loan of 35k, 60 mos. at %5.89 with a payment of about 675/mo. Where as the 36 mos. lease is 379/month 10k mi/yr. Here is the kicker. The residual value on the car after the 36mo. lease is at $18,796.40 and the balance on loan after 36mos. on the 5yr loan situation is, $15,243.80. A difference of $3,553.00 less on the loan. But now factoring in $300/month MORE I pay on the loan for the 36mos., this is $10,800.00 total. So was it worth paying 10,800.00 over three years to buy down the value of the car by 3,553.00? My answer is NO! I can take the 300/month an put it in savings or investment, thus offsetting the cost of driving a newer car. I don’t care about the 10k mi. restriction b/c I will buy the car at the end of the lease, because for instance, look up the same car with the “planned” amount of mileage, but three years older, which would be a 2004 right now and these cars are priced at 25k, so buy the car from the dealer after the lease end for 18,796.40, then sell it on the market and make a few grand…..I think I am seeing all angles of the deal, please let me know if something is in my blind side. Basically I am avoiding loan interest for the first three years of ownership, which is a very large savings with the cost of borrowing money these days at a rate around 5.89%. That is how the savings is made in the lease rather than buy of this car, and maybe in taxes, but that is a gray area to me right now since I haven’t researched it yet. I know the purchase after lease model of ownership has always been regarded as a way to pay the most for a car, but I think in this situation it works out better.

    • Niki says:

      Hi i’m not even sure how long ago you posted this post haha but I was amazed reading it because I have been trying to decide on leasing or buying and I decided to lease a 09 Nissan altima coupe with upgraded package… I put $8,000 down so now pay $249 a month 39 months and can buy the car in the end for $13,700 and now i was thinking exactly what you wrote above! Becase to buy it was going to be the $8,000 down plus $300 a month for 6 years which would be $29,600 in the end “paid to own” but now I can only pay 249 for 3 years then buy for 13,700 I will be spending about 2,000 more in the end though if I decide to buy but at least I have a 3 year test drive for $249 a month as oppposed to $300…. I hope u understand me haha but I def understand what your saying and def agree!

  11. Francis pham says:

    it’s ok to lease but’s a very bad ideal to lease and than purchase the car/truck from that lease (especially in the state of Maryland) Beware .

    I lease a 2007 H3 Hummer (love the truck, it’s so fun to drive). However, I had to pay the entire sales tax of the truck (5%) of the agreed price which was about 39K from the lease. So I ended up getting charge almost 2K in sales taxes upfront on the car instead of getting the 5% tax on my lease payments of about $500.

    Now if I want to buy the truck outright after the lease ends, the state wants me to pay an additional 5% sales tax on that new price (dealer and I had agreed on 31K as the resdiual value of the truck). The state of Maryland gets around this double taxation buy saying “well the first time you leased the truck, the dealer actually ends up with the sales tax bill since they still own the truck but of course the dealer passes this tax onto to the leasee immediately)

    But since you are buying it straight from a lease, than you are responsible for the sales tax again.

    So beware, leasing has its advantages but DO NOT LEASE and than BUY off that same lease in Maryland because of the double sales tax issue.

  12. Big Al says:

    I am a Busisness Manager at a Ford dealer in WI. Keep in mind you have choices with leasing or buying a vehicle as eluded to by other respondents. In WI, you pay the taxes on your monthly lease payment payment (pay tax as you go). Watch for manufacture’s specials. 0 down, 0 1st month payments, etc. and weigh them against the residual value or what is the guaranteed or fixed amount you can buy the vehicle for at the end of the lease (hows that for no haggle pricing!). Do a lease vs. buy calculation before jumping into any lease. At the end of the lease you have options like buying the car if the residual value allows for it or you have gone over miles, return the vehicle and walk away or re-lease a new vehicle if the actual cash value (ACV) drops and the residual value is out of line (let the manufacturer “pay” for their forcasting mistake), or negotiate with the dealer to buy the vehicle from you if you will be in positive equity at lease turn in. The market dictates values of vehicles and can be brutal, ask anyone who owns a large SUV! Leases do affect your credit ratings as you are financing through a lender, like Ford Motor Credit, and they assign it to thier lease company. It will show up on your bureau as an automobile loan. Beware of rolling negative equity into a lease as that has bad news written all over it! Most leases only allow 110% over dealer invoice to over advance on a lease where you would be farther ahead buying a vehicle where a lender will advance as much as 150% of the value of the vehicle. Then see if you can pay extra on the note to get into a positive equity as quickly as possible. One extra thought on being over extended on an auto loan is make sure you put GAP Coverage on the vehicle (which is FREE with most lease companies!). GAP stand for Guaranteed Asset Protection and will pay off the difference between what your auto insurance pays on a total loss of the vehicle and what you owe on the loan. Very big if you are in a negative equity position. If you did not put this on your current vehicle check with your local insurance agent to get rates. Great topic as there is no perfect and right way to buy a vehicle for every one. That is why there are choices, just be educated about your options prior to stepping into a dealer’s showroom…

  13. Rodney Atkins says:

    “In Maryland, the sales tax is 5%… With leasing, you will only pay taxes up front on the amount of the down payment (often little to no down payment is necessary for leases). Then, with each month’s payment you will be charged tax but ultimately, with leasing, you are only charged taxes on the fraction of the car that you’re using during your leasing period. You don’t pay tax on all $15,000 of car.”

    This is false. Maryland is one of 5 states that charges tax on the Capitalized Cost of the car in a lease. This means that you pay tax on the entire selling price, not just the depreciation amount.

    See #3 here: http://www.kiplinger.com/columns/car/archive/2008/car0107.html

  14. 42 says:

    I’m leasing a 2007 Audi A4 Quattro, 2yr lease, 15,000 miles a year, for $379/mo. It’s a great deal in that I get to drive a really nice sportcar for two years, but at the end all I have is an empty driveway. The lease ends in November and I have decided to buy a 3-4 year old car for cash, something like a Subaru or Camry or something else reliable, and drive it til the wheels fall off. I would never buy a VW/Audi product that’s out of warranty.

    Ideally I would not have a car at all, as even a used one will cost a few hundred a month to keep on the road in fuel, reg. taxes, and occasional repairs, but that’s not a feasible option at this time, not with a 50-mile commute every day.

  15. Car Purchase says:

    You need to employ common sense from the point of car purchase. Different cars have varying premium demands. Certain Cars are more expensive to Insure than others. If therefore you had this in mind before buying a Car, you would get a car that meets your Auto requirements and is comparably cheaper to insure. You would of course need to ask people who know.

  16. John says:

    I’d rather Lease. I can pay low monthly payments and for 3-4 years drive in a new car without having to worry about taking the car to the shop and having the mechanic rip me off. Plus I like the idea of having a new car every 4 years.

  17. bitten_never_again says:

    The example you have about maryland is wrong! I am in MD and leased a car. Turns out the state takes sales tax on on the whole car not just the part you leased. At the end if you want to buy the car back, guess what, you get to pay 6% on the residual again. Whee!

    If I had known I would have never leased. Do your homework BEFORE you sign on the dotted line.


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