More than half of all new cars purchased today are sold under a lease agreement. Why? Americans have a love affair with cars. We like them big, fast, shiny and luxurious with all the bells and whistles—TV monitors, 12-disc CD changers, moon roofs, heated seats, navigational systems. We want it all. Problem! Cars with all the bells and whistles come with a healthy price tag. Even with repayment terms on new cars ranging from five to eight years, the monthly payment on new cars has proven to be a burden on the average American family’s budget. Solution! In an attempt to continue to sell cars at double-digit profits to a growing economy of people living on the brink of financial ruin the auto industry is pushing leases.
The primary benefits of leasing a car are little to no down payment and low monthly payments. A car lease may be the cheapest way for you to get into a nice car but it’s the most expensive way to buy a car. The cheapest way to purchase a car is to pay cash. The second cheapest way to purchase a car is to finance it. The most expensive way to purchase a car is to lease it. In other words, by leasing a car you’re able to get into a car you cannot afford while maximizing the profits for the car dealer. At the end of the lease, they get the car back. They then sell it, earning more profit on the same car. Sounds like a great deal—if you’re a car dealership.
I strongly recommend that you never lease a car. When you lease a car, you are in effect renting your lifestyle. You may have the look of someone who is prosperous and who is on the move, but the very nature of leasing a car robs you of your future wealth. Here’s why. When you lease, you’ve obligated yourself to car payments forever. I define carsickness as the queasy feeling you get in the pit of your stomach when it’s time to make the car payment. I despise car payments because I understand the concept of opportunity cost. Car payments are what keeps the middle class from advancing to the wealthy class. The average car payment is approximately $400 per month. Do you want to have a car payment of $400 or more for life? I hope not. I would rather you invest the $400 toward future goals. $400 invested every month over 25 years with an average 10 percent rate of return would grow to $535,000. If the balance on your car is equal to or more than the balance in your retirement account, pull over—your retirement plan has flat tires.
The pitch and the truth about car leases:
The pitch. Lower monthly payments. Because you only pay for the portion of the car or truck that you actually use, your monthly payments are 30-60 percent lower than for a purchase loan of the same term.
The truth. Cars depreciate in value of about 40 percent to 50 percent over four years. The reason why the payments are lower on leases is because you’re paying for the depreciation of the car plus interest fees and more fees as opposed to the purchase price plus interest and fees. After the dust settles, you’ve shelled out thousands of dollars for the right to return the car to the dealer.
The pitch. More car, more often. Since your monthly payments are lower, you get more car for the same money and drive a brand new vehicle every two to four years, depending on the term length of your leases.
The truth. When you consider the total cost of making car payments forever, the price you’ll pay for the thrill of that new car smell every two years is enormous. They sell air fresheners with the new car scent at a fraction of the cost.
The pitch. Fewer maintenance headaches: Most people like to lease for a term that coincides with the length, in months, of the manufacturer’s warranty coverage so that if something goes wrong with their car, it’s always covered.
The truth. The same warranty exists on the car whether you buy it or lease it. Furthermore, the items that are covered under the warranty have a low probability of breaking down. That’s why they insured it. A manufacturer’s warranty is a marketing tactic known as “risk reversal.” It’s the manufacturer’s way of guaranteeing that you’re buying a quality car. Extended warranties are huge profit centers for the dealership and/or manufacturer. You’re better off banking the money as opposed to paying for an extended warranty.
The pitch. No used car hassles: With leasing, the headaches of selling a used car are eliminated. When your lease ends, you simply turn it back to the leasing company and walk away, unless you decide to buy it or trade it.
The truth. You’ll experience a headache right around the time the leasing company begins to add on various fees for violation of mile restrictions and excess wear and tear on the vehicle.
If you still persist on having a car lease, here are some terms you should know:
Capitalized cost. Total cost of the car.
Capitalized cost reduction. Down payment, cash value of trade-in and/or any rebates or discounts.
Residual value. The estimated value of the car at the end of the lease.
Depreciation. The amount charged for the vehicles decline in value through normal use.
Money factor. This is the cost of financing the car. The money factor is similar to the interest rate charged on a car loan.
Early termination. This is a charge assessed if you decide to end the lease early.
Excessive wear and use. In the event you go over and above the mile limitation, you’ll be charged additional fees.
(Mortgage and Money Coach Damon Carr is owner of ACE Financial. Sign up for Damon’s FREE Online Newsletter at http://www.allcreditexperts.com. Damon can be reached at 412-856-1183.)