The car industry has convinced many people that we need to buy new every two. Why? Because they want our money. The car industry has changed tremendously in the past 20 years. The Internet allows consumers to research prices and minimize the chance of being ripped off. The auto industry has been forced to find other ways to make money. The two most common ways are creative financing (often called a lease) and repairs.
Today we will focus on leasing so you understand that leasing is not in the best interest of about 99% of all consumers. The auto industry won’t tell you this. In fact, they will tell you it’s the best way to get the most for your money. They are right if you think short term. On an up front, month-to-month basis leasing makes sense. That is because leasing cost less per month than purchasing a car. However, when you look at the long term costs of leasing versus buying you will discover that leasing is generally the most expensive option.
A lease is essentially renting a car. When you rent anything, you pay the owners cost plus profit. Auto leases have the appearance of being inexpensive, but when you look at the fine print you will find large potential fees in the lease agreement. In their bestselling book “The Millionaire Next Door”, Thomas J. Stanley and William Danko explain how most truly financially successful people acquire cars. Leasing is not on the list.
There are several reasons a lease is not the ideal way to get your next car. First, when the lease is up, what next? Simple, you get another car; usually a lease. Leasing is how the automobile industry keeps consumers ‘buying’ new cars every few years. The average new car that is purchased is kept for almost 7 years verses two or three years for the average lease. This means the dealerships can lease over twice as many cars as they sell. In addition to the perpetual lease payments consumers may also be hit with hidden fees or costs associated with leasing. There are fees for going over allotted miles, wear and tear and even acquisition. It’s not uncommon for consumers to turn in a leased car and get hit with a very large bill.
What happens if you can’t pay the fees? The easiest thing to do is just buy the car at the prearranged price. The only problem is that you are paying more for the car than it’s now worth. However, since you acquired the car when it was new, the price isn’t quite as hard to swallow. This makes it real convenient for the dealership to convince you to now ‘buy’ your car. If you don’t want to buy the car, the dealership will kindly reclaim the vehicle and add the remaining balance to your next lease.
Car leasing was originally used by businesses to write off the car’s depreciation. It is tough for businesses to receive financing for vehicle purchases, but is relatively easy for them to lease a vehicle. The Internal Revenue Service tax code does not allow consumers to receive a tax break on the depreciation which eliminates one reason to personally lease a car.
Why are the dealers pushing the car lease? The answer is simple; they are able to make more money through leasing. This happens from the above mentioned fees. The language in a leasing document is fairly confusing so the typical consumer may not realize what they are agreeing to. Many consumers cannot define ‘capitalization costs’, ‘money factors’ or ‘acquisition costs.’ This confusion is designed for dealers to add hidden costs to the purchase price.
I would be remiss if I did not answer this very important question. What is the best way to buy a car? It’s simple:
- Create a “car” savings account and make a car payment into that account every month (don’t start this until you have paid off all your current vehicles)
- Find additional funds to add to the account (bonuses, gifts, raises, tax refunds)
- Buy a 2-3 year old vehicle. Cars depreciate at a faster rate during their first two years. Let someone else pay for the greatest depreciation and buy a dependable car at a reduced rate.
- If your current car breaks down beyond repair, use the cash you have to buy the best valued vehicle available.
Be your own advocate and research the vehicle(s) you wish to purchase. Make sure you know their value and be willing to negotiate. Kelley Blue Book offers a free valuation service on their website or app.
Lastly, don’t get emotionally attached to a vehicle until you actually own it. Be willing to walk away if you don’t get the deal you want.
Have you had any experience with a car lease? Would you do it again?
Craig Fossett is a guest blogger who hails from sunny Florida. When he’s not dolling out fantastic advice on leasing or wrestling alligators, he helps others manage their money the owner of Fossett Financial.