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Whatever you do, don’t lease.

May 21, 2012

Not so fast! Are you sure that is what you want?

A couple of weeks ago I wrote an article about cars and how you can save money by buying a used car and driving it for a long time.

Writing that article really reinforced to me how much we as a society love cars. It probably has been my most read column online, and I have heard more from people around town about that article than nearly all my other ones combined.

This article was about at buying cars, but you may be wondering if it would be wise to lease a car. The thought of driving a new car every three years and probably paying less per month than your current car payment is enticing. For example, right now Honda is offering a deal where you can lease a 2012 CR-V for only $239 a month.

Based on this, it might seem like leasing is a relatively good thing, but I need to warn you, not so fast!

There are many pitfalls to leasing a car. Don’t just listen to me; let’s look at what millionaires do. According to research from Thomas Stanley, around 80% of millionaires have never leased a car. Why?

First, when leasing a car, you have no equity. Even though cars go down in value, they still have some value. When you turn in a car after a lease, you don’t own it, and you may have to pay extra. If you don’t return the car in satisfactory shape, you will have to pay extra. If you driver more than your annual limit of mileage, which is usually around 10,000 to 12,000, you will have to pay extra.

Second, you may have to pay more than the monthly payment. With the 2012 CR-V example, you only have to pay $239 a month if you make a down payment of $2,799. Overall, you will pay a little more than $11,400 over three years for the use of that vehicle, which would probably be lower than if you bought it and were making payments.

The difference is you paid $11,400, and when you are done, you have nothing except the opportunity to make a new lease or buy a car, and you have $11,000 less to spend. You also could buy that CR-V you were driving for the past three years for an additional $15,000.

Let’s say you were willing to buy a four-year-old CR-V with around 50,000 miles.  Kelly Blue Book estimates you could buy this car from a dealer for around $18,000. If you drive 12,000 miles a year, which is the most you could drive on a lease without paying extra, the car likely will last another 13 years.

This would make your cost per year at around $1,380. For the lease, if you continue to renew at the same cost — which, with inflation, you probably wouldn’t be able to do— it is going to cost you around $3,800 a year.

One of the major secrets to building longterm wealth is to invest in assets that appreciate in value. Over long periods of time, this usually involves stocks and real estate.

Let’s say you continue to drive your older CR-V and take the extra $2,400 you’re saving a year and invest that in an S&P 500 index fund. If it can continue its 80-year average of 10% a year, after 13 years, your $2,400 a year becomes $64,000, plus you have a CR-V that still might be worth $1,000.

Saving money on purchases that decrease in value and increasing your purchases in areas that increase in value are good ways to build your net worth.

Cars decrease in value. If you want to save money on cars, remember a couple of things. First, there is a lot of depreciation the first couple of years you own a car. You can save yourself thousands of dollars by buying a used car. Second, even though a low monthly payment is attractive, you usually are going to end up on the short end of the stick with a car lease.

I know there are some who believe a car lease is a great way to go, and I’d like to hear from you. Check out my blog athttps://greatwonder.wordpress.com and share why you think a lease is a good way to go. Or, share your lease horror story.

The best post on my blog will receive a copy of the book “The Last Lecture” by Randy Pautsch. Why, you ask, am I giving this book away? First, it is a great book. Second, I have two copies, and even if I read it again, I still only need one.

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