Do you feel like you “have to have” a car right now? But at the same time, you don’t want all the cons that come with owning a car
- Models that depreciate +40% over the years
- Periodical repairs and maintenance costs
- Down Payments and documentation
Affording a good car isn’t a problem. What if you buy the model you want, but years later, you no longer want it? You’re going to spend a long time trying to sell it. And if you bought it new, the depreciation will do its thing.
Buying might be cheaper than financing, but it’s too much commitment. If you’ve never bought a car before, you will likely want to try different cars in the future before buying.
So you might have thought of renting as well. But whether you pick short or long-term, both monthly expenses are just as high. It’s not a good idea unless you need to travel somewhere like a foreign country.
What if you could afford a car worth +$30K for $200 per month or less? Leasing allows you to do that.
But do you think the dealers will let you get away with paying less? There’s always a catch somewhere.
Why Leasing a Car is a Bad Idea
There’s a reason most clients lease instead of buying. It’s cheap long-term, cheaper than renting or taking a car loan, and there’s no down payment.
And leasing isn’t for everyone. Only if you have the best credit score (700-750 or higher) you can get this contract. It presents itself as an exclusive deal, so you assume it must be a good deal, maybe better than buying.
Let’s start with the big main problem:
You don’t own the car
If you finance a $20K car with a 5+ year loan, it will cost you $23K+ in total. But if you lease, the expense is $21K-$22K.
The difference is, you own the car after paying the loan, but in a lease, you don’t. If that’s important for you, that makes it a terrible deal.
By the end of the lease contract, you return the car, although you can choose to buy it. If you leased a new car and it devalued a lot when you want to buy, it might be a good idea. But either way, car loans will be cheaper.
Still not as cheap as buying in cash.
High interest rates
When leasing a car, buyers think they can escape the depreciation effects. But the moment you drive off the lot, it turns into a used car with 15-20% less value. If you lease for five years, it will keep dropping another 20-30%.
Dealers will charge you higher rates for that. You still pay less per month than if you rented, but the term is longer.
High APR for a car
Technically, leases aren’t loans, so there’s no such thing as “interest.” Instead, they call it Cost of Capital or money factor.
The money factor may look like a tiny number, but if you multiply it by 2400, you get a ~14% APR.
How are you supposed to know that?
Because it’s not a loan, the dealer has no obligation in disclosing what you’re paying. At the end of your term, they can add up costs based on that car’s condition.
Add up the APRs for five years, and you’ll see why buying the leased car is expensive.
Dealerships expect to sell the car after you return it, so it should be in fair condition. To guarantee that, they place mileage limits and penalize you for driving too much.
This isn’t the kind of car you can take to commute to work five days a week. Along with the weekend escapes, daily drivers will exhaust that limit 6-24 months before the period ends.
Each extra mile you drive costs an extra 20-30 cents. You can, of course, increase your mileage limit, but you will pay extra for that.
High Insurance Cost
Because you don’t own the car, insurance works differently. You’re a risky client for the dealership, and you’ll likely need to buy the most expensive insurance plan on the spot.
If you know about car rental scams, you know how this goes. Even if your current insurer has a leasing plan, the dealers want you to buy theirs.
The requirements are $100,000 of bodily injury liability coverage per person, $300,000 per accident, and $50,000 in property damage liability insurance.
Credit Score Hits
You may find too late that leasing isn’t the best idea you had. You already committed to monthly payments, but you expect it to be easy to cancel, just like a car rental.
There’s no direct way to get out of a lease. And if you do, it will have bad consequences on your credit score. So before you sign the contract, remember that you’ll likely need to stay until the end.
There must be a way to get out without those effects. But it will probably require you to pay for everything that’s left immediately. Or you need to pay the APR and wait that year to cancel.
For more ways to improve your credit score quickly, check our guide right here.
To Lease or Not to Lease?
Although it has several downsides, leases aren’t necessarily worse than buying, renting, or borrowing for a car. Leases target a different buyer with other necessities.
The dealer assumes:
- You don’t want to own the car. You might want to try other models after finishing the term
- You prefer an affordable monthly cost, even if that’s more expensive long term
- You have excellent credit, so you won’t have a problem repaying it
Risky? Yes. It’s hard to justify a lease, although they’re just as useful as any other financing method.