Most personal finance experts would tell you that cars are a terrible investment. Cars are a “necessary evil,” a steep price to get from Point A to Point B. You’re leaking money on a depreciating asset.
They’d tell you to avoid debt a car as best you can. Owning a depreciating asset is one thing, but it’s far worse to borrow money against that asset.
And they’d tell you that leasing a car might be even worse because you won’t even own it at the end of the day! You’ve got all the negatives of purchasing or borrowing, but without the benefit of, you know, owning the car.
All of these points are directionally correct. I agree with them.
But I went out and leased a car anyway.
What is Leasing?
If “leasing” is one of those phrases you’ve heard before but never been sure of, it’s simpler than it sounds:
Leasing a car is a long-term rental agreement that allows you to drive a vehicle for a set period and/or set number of miles. A lease agreement generally includes:
- A length of two to five years
- Monthly payments
- You do not own the car. But once the lease has ended, you can often choose to buy the car outright from the dealer.
- An annual mileage limit.
- Maintenance and repairs are often covered under lease agreements.
Just think of it as a multi-year car rental.
Why is Leasing Such a “Bad” Deal?
A few years ago, I wrote a comprehensive analysis of the cost of car ownership. Simply put, most car ownership analyses on the Internet are woefully insufficient, and lead to incomplete, incorrect answers.
The short output of that analysis is that:
- New cars and used cars are essentially the same cost, as measured on a cost-per-mile-driven basis. The car market is relatively “efficient” – used cars are priced appropriately. You aren’t going to substantially improve your finances by buying a used car.
- Leasing a car can typically be 5% to 25% more expensive than buying new or used. The variance in that number (5% vs. 25%) is related to the specific make and model of the car, as well as the interest rate (!)** you qualify for on your lease.
**Yes – a lease involves an interest rate, which means it’s related to your personal credit score.
Now, every way in which you buy a car – new, used, or lease – involves some shared costs:
- Depreciation (applies to all vehicles)
- Insurance (all vehicles)
- Registration (all vehicles)
- Fuel (all vehicles)
- Maintenance and repairs (unless warranty or lease agreement states otherwise)
- Taxes (all vehicles)
- Dealer fees (all vehicles – though purchasing and leasing have different levels of fees)
- Interest (only if a loan or lease is in place).
In my case, I am not paying for maintenance or repairs (nice). But I did pay some extra dealer fees (eww) and the lease agreement involves an interest rate (double eww).
I ran my specific numbers and am undoubtedly paying a premium to lease this car.
Some Quick Numbers…
The most popular argument against leasing goes like this:
You make all of those monthly payments, and after the lease is all done, you have nothing. You don’t own the car. So of course leasing is going to be a terrible financial deal.
The argument is that possessing a car – owning that asset – simply must be a better deal than leasing. Right?!
Unfortunately, that argument is incomplete.
Because the car that you could be owning is, in fact, depcreciating beneath you. The early years of car ownership are the worst years of depreciation. Just how bad is it?
CarEdge has excellent data about car finances. Since I leased a Hyundai Tuscon, the depreciation graph below is worth looking at:
It shows that, after 3 years, a once-new Hyundai Tucson will be worth 65% of its brand-new value. That’s $12,600 of depreciation for this specific car. There will also be repairs and maintenance over the next few years, though we’d expect those costs to be relatively low for a new car. Perhaps a few hundred dollars per year? There will also be fees and taxes associated with buying a new car – here in NY, the 8% sales tax alone on a $36,000 car is $2900.
The point is that purchasing a brand-new Tuscon would cost me at least $16,000 over the first 3 years of the vehicle.
That money is gone. If you want to argue that leasing is “lighting your money on fire,” then you must accept that buying is the other side of the same exact coin. Leasing vs. Buying is simply about which Devil you’re willing to work with.
My leased Tuscon, including monthly payments, repairs and maintenance, fees, taxes, and loan interest will cost $17,180 over the next 3 years.
Yep. $17K for the lease is more expensive than $16K for the purchase.
The Upside of Leasing…?
I still haven’t hinted at a pretty important question: If leasing is a subpar financial move, why even consider it in the first place? Why did I do it? How many times did I fall and bump my head?
Don’t worry. I’m lucid.
I believe that particular life scenarios create an intangible, hard-to-measure value for leasing. And my family is living one of those scenarios right now.
We have a 6-month-old baby at home. And, at least for now, we plan to have more kids in the future.
My old car (a Rav4) was 13 years and 170,000 miles old. We wanted something a little more new – for safety, for comfort, for professional reasons too.**
**While some clients appreciate a financial planner who frugally drives his car until the wheels fall off, other people understandably ask, “The guy with rusty rims is giving me financial advice?!” Put another way: there is a difference between being frugal and being cheap. We each draw that line in a different place. I’d rather not flirt with too many of those lines.
So, a new car was in the cards. But we didn’t just want to get a car for today. We also asked – “what’s life going to be like in 2025 and beyond?” Specifically, what car needs do we have in 2025 and beyond?
Quite simply, I have no idea how to answer those questions.
- How many kids will we have? How many car seats and strollers? How much youth sports equipment? (please – just no hockey!)
- Will our life require two “big” vehicles, or will just one “family car” suffice?
- Will car safety continue evolving? Will we feel the need to chase those new safety features?
- Will a hybrid or electric car just make more financial sense?
For all these reasons (and many more), our most significant consideration for today’s car purchase was future flexibility. We want to be able to have a clean slate in three years and rethink our car situation from the ground up.
The finanical question, then, is “what cost am I willing to pay for that future flexibility?”
I know it won’t be free. If I need extra upside (flexibility), it will come with extra cost. I know that leasing won’t be a cheaper option – it won’t be both more flexible and cheaper.
But for my scenario, the extra ~$1000 amortized over 36 monthly payments** will buy us that flexibility. I’m going in eyes wide open. I can accept that price for flexibility.
**Not to mention, the $36,000 that I otherwise would have spent on buying the car is currently sitting in a high-yield bank account earning ~$120 per month. That interest more than covers the extra monthly cost of the lease. So now I’m genuinely wondering…is my lease actually cheaper?!
The point is, as with many finanical planning topics:
- I did the work to look at the numbers forwards and backwards.
- I thought about the question in the context of our unique needs.
- I made a decision with all the facts, and I’m quite content with that decision.
So if you see a guy racing by you in a new-ish Hyundai Tuscon, well, that won’t be me because I don’t drive that fast.
#fuelefficiency
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-Jesse
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Hi Jesse,
This article caught my eye as I also lease a car. I had heard all the negatives of leasing when leasing a vehicle became a “thing”. At the time I was driving a car that needed repairs almost monthly. My eldest son mentioned leasing a car as opposed to buying a car. He told me that every 3 years I would be driving a new car, and I would always have a car payment. In my case at the time, a monthly maintenance cost even though my car was paid off. I think it also helped that his Dad worked as a salesperson at a dealership. I went in and leased my first vehicle back in 2013. I was even given a comparison monthly premium if I leased or bought the car. It was a no brainer for me financially to lease over buying to fit my budget. I have leased since. What I appreciated in your article is taking a look at your situation then going from there. I will be facing that in 3 years as I just leased in October 2024. I have since retired, remarried and we will be deciding on what we will be driving as we age. I have to admit, I was nervous about the miles contract when I first leased. The leasing deals have changed over the years, and I have not had a bad experience when my lease was up with a couple of times going over the miles. The other thing I like is the notifications I get from the dealership on keeping up with service on the vehicle. Life gets crazy and it is easy to “forget” to take care of routine maintenance. So, to all those that say leasing is terrible, I have to say for me it’s not. Thank you for your article on leasing. I really liked your financial analyst of it too.
Thanks for writing in, Beth! I hear ya…there are pro’s and con’s to each. And while the finances do lean *away* from leasing, there are many lifestyle reasons why it might be right for you.
Best,
Jesse
There is another potential component to the ‘lease vs.buy’ calculation, depending on the make and model of your car and the dynamics of your local market.
At the end of the lease you will have a buy-out option, i.e. the price if you want to purchase the car from the dealer at lease expiration.
With our last two leases (both more expensive cars than the Hyundai) we went to Carmax, and they made us an offer on the spot that was thousands of dollars higher than the dealer’s lease-end purchase price. The whole process took about 90 minutes, they handled all of the paperwork and we just left the lot with check in hand for the difference.
Each car had a 36 month lease, and the effective monthly cost was significantly lower based on the check we received at the end.
(NOTE: I don’t work for Carmax, and have no idea whether this would work (or work better) with other buyers of used cars, or work as well with less expensive cars.)
This is a huge hack! I’ve never heard that. Love it.
interesting! Thanks for sharing that tip, David!
Jesse
Jesse –
This is the most compelling read I’ve seen for a lease. I love how you tied it to your priorities and life stage. Thoughtful, as always!
Happy New Year!
There are a few gotchas that one need to be aware of on leases:
1) the myth that leasing involves a car owned by someone else (true) and that maintenance is not as critical (false). All cars have to be maintained at regular intervals and lack of maintenance will show up at lease end.
2) You write ” There will also be fees and taxes associated with buying a new car”. Depending on the state, leased vehicles also require sales tax up front, just like in purchasing, or pay a rental tax each month based on the monthly payment.
3) many lease deals require a “down payment” up front, which is non-refundable, and used as a tactic to make the monthly payments lower.
4) The residual value used to calculate the monthly payment is a “heads I win, tails you lose” proposition. If the residual value at the end of the lease term is lower than the market value, the dealer/finance company has another source of revenue by wholesaling the vehicle or selling it retail. If the residual value is higher than the market value, the lessor will find reasons to charge for “wear and tear” and make themselves whole.
5) A lease necessitates the lessor to charge a risk premium for the depreciation as opposed to an owner absorbing the risk.
6) The only absolute way to minimize cost per mile is to buy a car and drive it for as long as possible.
7) Additional dealer revenue/lessee expense: sell “GAP” insurance that supposedly protects the lessee from having to pay the difference between remaining lease payments plus residual value if a vehicle is totaled. There is no easy way out of a lease.
Regarding GAP insurance:
Buying GAP via the beloved dealership finance office runs several hundred $. You can cancel it for a prorated refund once the amount owed is less than insured market value with some margin of safety.
Buying GAP via our insurance agent – $4/yr. No joke. I’ve leased several times over 40 years but usually purchased outright or financed with the plan of keeping it “till the wheels fall off” or we did a hand me down to one of our four kids, years ago. Looked at leasing again in 2024 when I replaced my 13 year old car with the idea of simplifying maintenance to just oil changes and tire care/rotations within 36mo/36K miles factory warranty. Math comparison result was heavily weighted toward purchase vs lease. I put a little $ down to purchase to get a “rebate” if we financed. Paid it off in full shortly thereafter. Used GAP in the interim just in case.
Bonus – also discovered that insurance company offered a 12 month/15,000 max. mile policy rider for $34 to essentially cover the purchase of a replacement vehicle should the car be totaled within that one-time window. Hard to beat that.
Cheers Greg, I appreciate that input!
Always some good thought provokers Jesse, nice read.
Did you consider buying a 3 year old off lease Tucson and then just trading it in if/when it no longer suits you? I think it accomplishes all the same goals at a lower cost of ownership if that matters to you.
Even if you per mile cost comparison is correct between new and used (previous article), it’s not consistent of course. The early years are high in depreciation, financing and insurance costs. The later years high in maintenance costs. Own in the middle and you hit the sweet spot.
Hey Aaron!! This was probably the top choice of ours, *assuming* we didn’t go with an outright new car. I think this the most cost-effective way to do it—although, the market for slightly-used vehicles is priced very efficiently.
But to cover our safety considerations for the baby / future kids, we decided to start with an outright new car.
Why not just buy a similar or identical car with cash and sell it in three years, when you know what you want? I’ve never had car payments after my first used junker, and now I typically buy slightly used and drive them to over 200K miles. I just don’t like the feeling of owing anyone anything, so I never borrow under any circumstances.
I’ve been waiting for this question, Steve 🙂
That thought was on my mind. Part of the answer has to do “Depreciation Risk” and what I’ll call “Haggling Risk.” Your plan takes those risks on my shoulders 100%, as opposed to paying a premium for the dealership to take on those risks.
Another consideration for me was simple cashflow.
My options were:
Pay ~$380/month on the lease (3 years)
Pay ~$800/month for a 0% loan (4 years)
Pay ~$38,000 lump sum up front.
Technically, I could have taken the blow from any of these options. But based on where I am today, the first option is definitely the most ideal.
Thank you for the article! I found your website from your new vs used car article, so it’s nice to see a real-world example of the lease option.
As David F alluded to, leasing can actually be cheaper than owning if things align just right. There’s a whole website and forum about “lease hacking” to get the lowest cost of ownership possible on a lease using the same math the dealerships use. There’s a book called “Car Leasing Done Right” by Jorge Diaz that goes through all the details as well, although the information is available for free online as well. The original version of the book is from the Canadian perspective, but math is math in this case.
That said, cost isn’t the be-all-end-all, as you stated here. I appreciate you going through some of the details of your specific situation to come to your decision. I think we’ve come a long way from the “common sense” sense approach of buying a used Honda/Toyota and driving it until the wheels fall off and your blog has been a big part of that progress.
Thanks Zachariah, that all makes sense. Sounds like an interesting book, too.