Luxury car lease deals: It’s a trap!

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Luxury car lease deals can be a trapLately I’ve been seeing a lot of lease deals on luxury cars that, on the surface, seem pretty tempting. I mean, why drive a regular old family sedan when you could be stylin’ and profilin’ in German luxury?

But before you get too excited, it’s worth digging down into the numbers a little bit. For instance, I recently saw a deal for a 2013 BMW 328i sedan that’ll cost you $369 a month, with $3,844 due at signing.
How is that possible, when monthly payments on a 48-month new-car loan for something like a base Toyota Camry can be $400 or more a month?

The difference comes down to equity. When you buy a car, at the end of the loan term, you own the car! Lease deals, in contrast, typically give you no equity in the car. You’ve arranged what amounts to a long-term rental. At the end of the lease agreement, you don’t get anything but an option to buy the car for about what it would cost to buy it used anywhere else.

And that’s if you haven’t gone and done something rash like put some nicks and scratches in the finish or driven more than 30,000 miles (10,000 miles per year), the mileage limit on many leases. If you have, you’ll pay something like 20 to 25 cents for every mile you drive beyond the limit, and an adjustment for the damage.

In other words, when a lease ends, you’re back to square one and in need of a new vehicle with nothing to show for the last three years of payments. You could just start another lease if you wanted, but serial leasing is even more expensive than buying the same vehicle and holding on to it, as you can see in the chart below.
The numbers on luxury car lease deals
Over the course of 10 years, buying the car saves you almost $12,000 in additional outlays that could instead go into an IRA or other savings vehicle to increase your wealth over the long term. While you wouldn’t be getting a brand new vehicle every 3 years, you could still be driving a BMW in this example, and new cars these days can easily go 10 years or more without needing too many major repairs.

I’m not even going to put up what the chart would look like with the Toyota Camry because I don’t want to belabor the point. But this is just one more place where automakers are banking on consumers focusing on the monthly payment, and how big a monthly payment they can afford, rather than cost of ownership.

Instead of being a “payment buyer” and getting suckered into making what amounts to a massive transfer of wealth to an auto company, consider the overall cost over the long term. Don’t think about what you can afford; think about what you want to pay to achieve your financial goals.

What do you think? Is leasing a good deal? Or would you rather buy?

Update: A reader wrote in with some good points about the virtues of leasing.

Don’t want to air our finances or lease terms, but your article caught my eye. My husband and I are “serial leasers.” We work with a leasing agent who, for a fee, negotiates the terms. It rocks. I want a new car every three years. I find a great deal of comfort in knowing my car is under warranty and I do not need to pay for maintenance (‘included’ with the car). Leasing makes cost more predictable, for us. My husband loves to lease hybrids because of the ever-improving technology. Here is something I wonder (vague memories of hearing some story in the past): what is more environmentally friendly? Buying a new hybrid/electric or a used car with good fuel economy?

These are some great points. Especially if you have a long commute, I can definitely understand the appeal of getting a new car with the latest and greatest tech every few years, and the assurance that repairs will always be under warranty. I just want people to be aware of what they’re paying for the privilege so they can make sure it’s worth it to them.

(Photo: Lucas Arts)

{ 10 comments, please add your thoughts now! }

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10 Responses to “Luxury car lease deals: It’s a trap!”

  1. Bryant says:

    I’m glad there’s an article on this trap. Really, what people are paying for is the BMW sign…quite expensive IMO. I’m of the opinion of either buying a new economy car (in your example, a toyota camry), or a slightly used economy car. Either way, I buy to keep and I keep for a long time. I think the key here is that a car is not an investment as some might think. Not sure why I would spend thousands to drive a nice car to impress that stranger in the next lane over. I’d rather invest in real estate or save for retirement. Great Article!

  2. Claes says:

    Bryant: Thanks! Totally agree… to me, leisure and freedom from worry are far more valuable than a luxury car will ever be.

  3. Texas Wahoo says:

    I’m guessing that anyone leasing a BMW is doing it for aesthetic reasons and because they like to drive new cars and are willing to pay for that ability. That would seem to be especially true if they really require $11,000 down.

  4. Tummy says:

    I find “bargain” minded people sometimes are very narrow minded when talking about cars.

    Camry doesn’t drive anything like a BMW. I don’t think people who are shopping would even compare the two Camry to 3-series. The Japanese comparison would be Lexus or Acura. The Japanese luxury brands cost almost the same and in some cases lease for more. BMW tends to have higher resale value / higher residuals that are artificially inflated by BMW subsidizing new cars. Dealers actually make more profit on the certified-used cars, so they need a constant stream of 2-3 yr old lease returns.

    Another thing to keep in mind is that for BMW, all maintenance is included for 4 years and they only need to be serviced once per year. Where Camry needs to be serviced every 5,000 miles. How much is your time worth to bring the car in for service?

    If you have a business, you can deduct a lease from your income taxes, where if you financed a car there are many restrictions on what you can write off. That is why many sole proprietor businesses will either lease or buy a SUV (over 5,000lbs) to qualify for the tax deduction.

    Personally my last three cars have been used Mercedes (2-4 yrs old) that I paid cash, or financed due to low interest rates. Less than 2% interest for a used car is pretty good. You need good credit to be able to do that.

    Why pay $100k when they depreciate to $35k-$40k in a couple years? During 2008-2009 when it was hard to get credit you could buy a 2 yr old Aston Martin V8 Vantage for $40k in cash. Now the same, now older, car is selling in the $70’s due to the free flow of credit.

  5. Claes says:

    Texas Wahoo: It’s worth noting that the figure for “cash due at signing(s)” reflects the multiple signing costs you’d incur over 10 years of leasing
    Tummy: Having a small business definitely changes up the calculus; you can’t deny the tax benefits of leasing for businesses. Some good points there on resale values as well. Thanks for reading.

  6. md says:

    Unless I missed it, your 10 year analysis should add the market value of the purchased car for a true apple/apple comparison.

    The purchaser saved more than $12,000. It’s $12,000 + whatever the car is worth at year 10.

  7. Claes says:

    good point, md. Would certainly make sense to add the recoverable amount there. Thanks for the heads up.

  8. NJBlue says:

    This article started as a lease vs buy comparison but the comments seem to be BMW vs Toyota. If we focus on lease/buy on a particular brand, we’d find that “serial leasers” always pay the most in depreciation costs since cars depreciate the most in Years 1 through 3. What I prefer to do is buy a 2 year-old car with low miles and sell it four years later. If I can get a certified vehicle with a 100k warranty, so much the better.

  9. Sergii says:

    Great article. The main mistake people make is they look at leasing as if it was buying, and they see the fact they don’t own a car as a downside. While in fact that’s THE WHOLE POINT of leasing, I lease because I DON’T WANT to own a car so I don’t have to fix it, worry about it’s market value in the future (when I decide to sell) and so on. Yes, I won’t own my car in the end – but I didn’t pay for it either. I only paid for the car’s gradual depreciation that happens in any case whether I like it or not.

    Leasing makes a lot of sense if you understand what it really is. Even if you finance – your car depreciates in value. Say you pay about $600 a month and this amount can be basically split into 2 parts – first $300 is about as much as your car drops in value per month (rough numbers just as an example) it means that while you pay $600, you’re instantly losing about half of this payment to depreciation factor, and the other $300 actually goes towards building your car’s final value (car equity) that you’ll have in the end. Years later, when your car is 5 or 6 years old and costs HALF of what it cost new – you still make payments of $600/month like the day you got it brand new, only now it’s 6 years old. When it’s finally paid off, it lost about half in value, warranty expired 3-4 years ago and you’ve definitely spent considerable amount on maintenance and repairs. Moreover, the remaining equity you have is in the form of a used car that you STILL HAVE TO SELL to cash in.

    Now you could’ve leased it for $300/month and yes, you wouldn’t own a car at 1/2 it’s original price in the end, but your payments were 1/2 less as well (which makes perfect sense). But here’s the the best part – you’ve been getting into a BRAND NEW CAR every 2 or 3 years, didn’t pay a penny for repairs or maintenance and never worried about selling your used car trying to compete with current deals and other cars on the market. Moreover, you’ve been saving $300/month (as a trade-off for not having a used car in the end) that you could definitely put to better use. And if owning a 6-year old car in the end is still something you’re after – by all means, take all this money you saved and buy yourself ANY 6-year old car at a FAIR market value, you have your equity in cash and you’re not stuck with a used car.

  10. Carey says:

    It also costs more to vacation vs staycation. I rarely vacation, because paying thousands of dollars for a week or two out of the year seems silly. I’m just as happy to stay at home and read a good book. Happier, actually. On the other hand, I drive my car multiple times a day, and paying a thousand or two more per year to drive a fabulous car is something I am seriously considering. I love cars, and I love to drive, and I want a performance-oriented vehicle, and I can afford it.

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