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Luxury car lease deals: It’s a trap!

Lately 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.

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)