The Disadvantages Of Leasing A Car

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lease carHave you ever seen someone who was always driving a new car almost every other month it seemed? I remember, right after I graduated college, I had a few friends like that and always wondered where they got the money to get into the “flipping” cars game. They would have the newest of the newest models of the most popular cars. Meanwhile, here I was driving my 10 year old Honda Accord with over 100,000 miles, an air conditioning system that only blew hot air, a driver side window that wouldn’t roll all the way down, a passenger side door that you could only open from the outside unless you knew magic technique to operate the broken handle, and occasionally I had to literally push it and jump in just to get it started. I didn’t get as many chicks as the others with the “phat” rides got…I wonder why?

As I got older and saw that many of those who were in the “flipping” car game were still living at home with their mothers because they couldn’t afford to move out. On the other hand, I was operating my own company while living on my own in New York City. They were leasing their cars while I had owned mine outright. When it came time to investing in my new business, that lack of a car note made a huge difference…thank God I had saved! There is a huge difference between leasing and owning your own car and since I am a strong advocate of the “ownership” mindset let me explain to you the advantages of owning your car as opposed to leasing it.
When you lease a car the two main charges are a depreciation charge and a finance charge. The depreciation charge is the price that the vehicle has gone down while you were using the vehicle.  The finance charge is the interest rate that you are paying on the term of the lease. Nothing is going towards anything of real value to you. Depreciation is only an accounting expense that just so happens to be the most costly in the earliest years of the vehicle, which just so happens to be the time that you are leasing the vehicle.

Cars depreciate 25% as soon as you drive them off of the lot.  If you purchased a car for $20,000, as soon as you drive it off the lot it is only worth $15,000.  This is why those millionaires who really understand the value of a dollar will purchase a pre-owned vehicle (1-3 years old) that has already taken its biggest hit of depreciation. This is why you will never hear of them leasing a vehicle because they understand the value in ownership and renting.
I am not saying that there are no benefits to leasing a vehicle.  If you lease a car you will probably have lower monthly payments, they require little to no down payment upfront, you are never in a position when you owe more than what the car is worth, and if you are business owner you may be able to get some tax advantages if you use the car for business purposes.  I get it.

However, most people who lease vehicles go for years of always having a car payment and not having anything to show for it but a lower savings account. Depending upon the type of lease that you have when your lease term is up you either hand the keys over to the dealership and lease another vehicle, or you finance the remaining value of your car to work towards owning it and go from lease payments to loan payments.  The deal that you thought you’d get if you decide to purchase the vehicle after your lease contract is up is never as good as you would have thought it would be. This is because in a lease the most expensive portion of the payment that you are paying for is the high depreciation expense and very little if nothing towards the value of the vehicle.

Other disadvantages of leasing are as follows:

•    Terminating the lease can be very costly
•    You don’t own the vehicle so you cannot make any major changes to the car, paint it, or add equipment to it.
•    Mileage restrictions and putting too many miles on the car can be very costly if you go over the allowed limit.
•    Insurers usually charge higher coverage costs for leased vehicles (their reasoning: if you don’t own the car you are less likely to take good care of the car than someone who does own the car).

When you lease a car you are essentially committing to a lifestyle of renting your car which ensures you will always have a car note. Wouldn’t it be nice to purchase your brand new Toyota with a 5 year note, pay it off in three years, and in save up the amount you would have been paying towards a car note for the final two years into your savings account? Little tactics like this over a lifetime add up towards a fruitful retirement where you can enjoy your golden years without having to work for the golden arches. Start your tomorrow today and let’s shop smart for that new car!

Ryan Mack, Author of Living in the Village and President of Optimum Capital Management, LLC

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