Thursday, February 10, 2005

A New Lease On Life

Is leasing a car a good idea?

It seems to be, doesn't it? The monthly payments are usually a lot lower, and there's nothing more important than that, is there?

Well, actually, yeah there is. See, the difference is, in essence, this:

When you finish the car-financing process, you own a car. It is yours, free and clear. You can sell it and make some money off of it, you can keep driving it without a car payment, you can do whatever you want with it.

When you finish the leasing process--well, you own nothing. You're done. In fact, you probably still owe even more money, like 12c a mile fees for going over mileage, fees for wear-and-tear on the car, etc.

In other words, you basically just rented. Only not only did you rent, but you financed the rent.

Imagine you wanted an apartment that normally rented for $750 dollars a month. Only instead of just paying $750 a month, your landlord made you guess how long you needed the place. You decided five years. Your total payout at that point would be $45,000.

So instead of just taking the $750 a month from you, the landlord says he'll "loan" you the $45,000 right now to pay the rent for the place for the next five years, and you can pay him back in monthly payments, plus 8% interest.

Your monthly payment would now become $872 a month, and you'd end up paying $9,313 in interest above your regular rental costs.

By "financing" the lease, this is essentially what the car company is doing. Charging you interest on what is, after all, just rent, since they own the car at every point.

Of course, at that point, they're willing to sell you the car--but you're certainly not going to get a bargain for it. Anybody will tell you the total payout for purchasing a car after a lease is greater than if you had just bought the car in the first place.

People think leasing allows the dealer to take the "hit" on initial depreciation. This idea, to put it bluntly, is insane. It's calling the grass blue and the sky green.

Leasing is taking the initial hit on depreciation. You are bearing the entire brunt of it, and not only are you doing it, you're paying interest to do it. When you're getting to the point where the guy who financed would start to see some equity, you're giving that machine up so you can go help the dealer pay the depreciation on the next car you lease.

So why are the nice men at the car dealership so eager to push leasing to you as your best and cheapest option?

I'll bet you can guess.

According to Dave Ramsey, who calls leasing "fleecing":

Smart Money magazine quotes the National Auto Dealers Association (NADA) as stating the average new car purchased for cash makes the dealer an $82 profit. When the dealer can get you to finance with them, they sell the financing contract and make an average of $775 per car! But if they can get you to fleece the car, the dealer can sell that fleece to the local bank, or GMAC, Ford Motor Credit, Chrysler Credit, Toyota Credit, etc., for an average of $1,300! The typical car dealer makes their money in the finance office and the shop, not in the sale of new cars.

Car dealers know they can sell you on it, because they know most people think in a month-to-month, paycheck-to-paycheck mindset.

So am I saying you should finance new cars? Am I saying you should even buy new cars?

Not remotely. But that's another post.


theFrog said...

And THAT is why I have always paid CASH for every car I've ever owned. Sure - they're all pos cars, but they're MINE.

It's especially awesome when you buy cars used after their lease has run out.

Erik said...

I'm so jealous. That was smart.

I realized today that if, when I bought the car I have now, I had saved the money the insurance company gave me for the one I wrecked, and then saved the amount I get in my mileage check each month for the number of months it took me to find this car, I could have paid cash for it.

Instead, I financed it for five years. My kids would have started school before I paid it off, if I wasn't doing this.

theFrog said...

honestly, if you saw my cars, you would cease being jealous very, VERY fast. We're almost at the point where we're fixin to leave them for dead and try our hands at a brand new-to-us pos.

I gotta say, I got VERY spoiled in CA with that whole "cars don't rust" thing over there.

katehopeeden said...

I have always been surprised that people lease cars because you are really just renting them. Your monthly payment is sometimes less, but you still have insurance. Plus it isn't ever *your* car. I work for Ford and I am always surprised when someone wants a lease. My boss calls it a scheduled trade in, lol. Like in three years, you trade it in for another. But you don't build up ANY equity. Not my bag. If I pay for something for three years, I want to own it (or at least own three years worth of it). I WILL NOT lease... but then again, I can buy a car for less than invoice (new) and wholesale pricing (used) :P


Erik said...

Okay, it's official.

We're all calling Kate the next time we need a car.

And I know about the toll living near the coast can put on a car. It's not even the outside--you can do in a radiator in a heartbeat.