Cars are one of the hardest subjects for me to give advice on. Cars themselves are a necessity 90% of the time, but the type of car and how you purchase it is all personal to your situation. Usually I write about how to buy a car with the least amount of damage to your finances, but today I want to write about leasing a car. Many people, including myself at times, think that leasing is just throwing your money away. And on the surface it seems that way. But today I want to share a story of a client of mine, Mary, for whom leasing was the perfect option.
First of all, like anything else you buy, it is about the math. You can’t just look at the monthly payment or the total cost. You have to look at both and more. Whether you pay cash or finance a car (which I don’t recommend if you don’t have the money to back it up), you will have a car expense every month; either in the form of what you stash away or what you pay. The monthly cost of owning a car is there in some form or other, just like car insurance.
Mary needed a car because her old car had 230,000 miles on it and was getting to the point where some major expenses could occur (engine, transmission, etc.). Mary owned the car free and clear. Also, 4-6 times a year, Mary was renting a car to go on vacation or to visit family because her car wasn’t reliable enough to go long distances. This cost her about $200 each time. After running all of the numbers (which we will visit in a moment), leasing was the best option for Mary.
Here is why:
- Cost – she was able to get a brand new, reliable car for $3000 down and $135 a month (2015 Honda Civic). This is an amount that she had cash to cover; therefore, it wasn’t debt.
- Warranty – the car came with a full warranty covering everything for the term of the lease (36 months). Therefore, she will not have any repair bills.
- Gap Ins – Gap insurance, which covers the difference if your new car is totaled or stolen, was included in the payment. Adding this to your insurance policy if you buy a new car would be an added expense above the payment.
- New Car – she will get to drive a new car every 3 years if she stays on track with this plan. If you are paying for a car every month anyway, in one form or another, why not drive a new one?
The bad parts of a lease are 2 fold – you never own the car and you have to stay within the mileage or you will owe additional money. Now this worked for my client in this particular situation.
There were 3 options for Mary:
- To lease the car, which down payment included, cost her $214/month to drive the car.
- To buy the car, which with the same down payment, would cost her $379/month plus any repairs needed after the warranty expires.
- To pay cash for the car, which would cost her $316/month plus repairs.
I want to make one point very clear about car buying or any other purchase you make – never promise money you do not have. This is called debt and will stymie you every time. The point of this post today and of Mary’s story is that when buying anything, but especially something as big as a car, do what works for you. Run the numbers, count the cost, and make the best decision you can. Mary paid cash, $8000, for the car with 233,000 miles on it. She had it 7 years. This means it cost her $100/month plus repairs plus rentals to own that car. Now she can drive a new car, no worries, for less. She is not in debt because she has the cash on hand to pay out the lease if something happens like a job loss. In 3 years, she will look at the numbers again and for her, a lease will probably be the way to go. But who knows what the future brings. Do what works for you today and make the best, wisest decisions you can for you. Personal finance is just that – personal.