Buying a car is a better deal than leasing for one primary reason: Once you pay off your auto loan, the car is essentially “free,” and the longer you keep it in the garage, the more you save. If, on the other hand, you lease a car your whole life, well, you’ll be making car payments your whole life. That great deal the salesman is pitching — Only $199 a month! — sounds like less of a great deal when you multiply it times 40 years.
Leasing a car is like always going to the more expensive restaurant, or making sure you never, ever, pick up an item at the sale price. When you lease, you are essentially paying for the vehicle’s loss of value as it ages, what’s known as depreciation. And since the biggest depreciation occurs in the first few years, you are in effect always paying top dollar.
Plus, your insurance rates will always be at their peak because the car is at its most valuable point in life. If you own a car and hold on to it for 5, 8, even 10 years, it will become less expensive to insure as it ages. Sure the monthly payments are higher when you own, but that’s because you’re building equity in your ride.
So if buying is a better deal, why are the monthly payments often higher? That’s because you’re getting more: You’re actually buying the whole car, for keeps, not just paying for the depreciation. And of course you can sell it at any time. If you lease, you are locked into a contract, and you’re likely to get hit with a big penalty if you have to get out of it.
THE 10,000 MILE RULE
Don’t even think about leasing unless you put 10,000 to 15,000 miles on your car every year. However, anything much above that sweet spot and, with most leases, you’ll pay a mileage penalty. And if you drive substantially less, you’re paying for depreciation you are not causing: You’re giving the dealership a gift when you turn that car in with low mileage.
WHEN LEASING BITES BACK
If the car is stolen or you total it, your insurance will only reimburse you for the car’s market value, which might not cover what you still owe on your lease. So you have to write a check to the dealer for a car you can’t drive. Like most problems, this can be avoided by spending more: You can buy extra “gap coverage” to protect against this.
This excerpt from "Worth It ... Not Worth It?" was reprinted with permission from Business Plus/Grand Central Publishing.