#21: Auto Leases

25 Rules to Grow Rich By

This is part of a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #21: Lease a new car or truck only if you plan to replace it within two or three years.

I’m absolutely stunned that a personal finance magazine would ever recommend a lease to its readers. A lease is merely a rental of a car too high-end for you to actually afford, so in the end you’ve dumped out a lot of money and received nothing in return.

Let me make this as clear as possible: the only time you should ever consider an auto lease is when image is more important to you than financial freedom. If that’s the case for you, then by all means, lease yourself a BMW or a Lexus.

Many people will defend leases by using diagrams to “demonstrate” that you’re actually getting more car value this way with a $500 payment each month than if you bought a lower-end car with that same $500 payment. Want to know what the difference is? After four years, the payments on the lower-end auto will stop, and you’ll keep the car. After two or three years with the lease, the lease will end, the car will go back to the dealer, and you’ll have nothing at all to show for it: no car to continue driving, no nothing. You’ll just have to go to the dealer and get another “value” lease.

As for me, I own my automobile and I plan on driving it payment-free for several more years. What will happen then? I’ll get a small trade-in value for it, hand over the cash I’ve been saving instead of making the payments, and walk off the lot with a late-model reliable automobile that’s completely mine from day one. No payments, no leases, no nothing.

Let’s even use the situation from the rule, that for some reason you plan on getting rid of the car in three years. You want to lease a 2007 Lexus GS 350, and you can get that lease for $581 a month. On the other hand, you can sign up to purchase a GS 350 for about $655 a month. Of course, both of these numbers are high, but I’m assuming if you’re considering a lease, you’re really poor at negotiating.

Now, what will you have in six years? The comparable 2001 Lexus GS 300 has a book value today of $21,000, with an original sale price comparable to the GS 350 today (in the range of $40 K), so let’s use that as a baseline. With the lease, you spend $20,916 for three years, then you return it to the lot to lease again, lease a 2010 Lexus for the same amount, spend $20,916 over those three years, and then have to go back to the lot again looking for a 2013 Lexus.

If you buy, you’ll make $47,160 in payments over those six years (about $6,000 total more than your leasing pal, or about $80 a month), but in the end you’ll own the Lexus, which will have a book value in the $21,000 range. Head to the lot with your leasing friend and both of you pick out a 2013 Lexus. You can trade yours in, knocking the cost down to about $20,000, meaning you can pay it off and own it in three years with payments less than your pal will be leasing his for for three years. At that point, you will have a free and clear Lexus and he’ll have nothing at all.

If you enjoy having no assets of your own, by all means, sign a lease. As for me, I’ll be rewriting that rule.

Rewritten Rule #21: Never lease an automobile.

You can jump ahead to rule #22 or jump back to rule #20.

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  1. Amy says:

    Never? My MIL leases a new car every 2 years. If she were buying, she would be trading in her used car for a new one every 2 years for the peace of mind. She’s not the sort to haggle, and would take whatever the dealership offered in trade-in. I agree with the original rule: if you know you’ll be just paying for the depreciation either way, leasing is much easier. It might not be cheaper, but I bet it’s close.

    Of course, it doesn’t hurt that she gets the Ford employee discount, which makes leasing crazy-cheap in Detroit.

  2. Trent Hamm Trent says:

    Obviously, if someone is offering great compensation for leasing, you should lease, but without employee discounts and the like, you shouldn’t lease.

  3. jake says:

    I think it comes down to personal beliefs. I for one want to own what i pay for. To me it just isn’t logical that i pay some entity large sums of money only to walk away with nothing.

    I do agree, and you hit it on the spot when you spoke about image being a deciding factor for those who lease. I have a woman, who is very attractive in my work place, and of course she knows it. She has a brand new car about every 1-2 years. She also has two jobs. Some people equate image to success, which a lease is perfect for.

  4. localbuyer gordon says:

    what if you lease a car like a jetta that can be leased for $248 a month and take the difference between what you would be paying if you bought it and put that in a savings account.

  5. Mike says:

    The problem with that is that 90% of people wouldn’t do it. Oh sure, they’d hang in there and would save the difference for a couple months, but would eventually quit for one reason or another (“Money is tight this month,” or “I NEED those new jeans,” or “I’ll just catch up next month.”). Then you’re still stuck with a crappy lease.

  6. Bruce says:

    As an extension on this article, my advice that I give to everyone I know is this. Buy a two year old car, you miss most of the depreciation and get the car for half price. Drive it into the ground or until you can’t stand to look at it. Cars with a little care will last 30 to 40 yrs. Currently of the four cars we drive one is 36, one 30, the other 22. The wife has the newest at 8. None are beaters. Just my advice, but I did retire at 39 with over 2M on a waiters’ salary.

  7. Rick says:

    If you need a dependable vehicle and don’t have access to a shop or otherwise can’t live without your vehicle, leasing or buying new is quite often a legit option. I think the word “never” should be omitted from this article. The word “think” before leasing should be inserted instead.

  8. Sam says:

    I work in Auto sales and let me tell you all one thing, leasing is for fools PERIOD. A car is a car, it gets you from point A to Point B. The guys selling cars know one thing you don’t. Here is the secret. You can lease a car but dealerships KNOW FOR A FACT That you will go over in your mileage by a big chunk of $$$$. Then to not pay 5,000 in over mileage fees or wahtever amount is due, they will minimize the debt and “roll it over” into a new lease..its a vicious cycle that never ends. I know one guy who has rolled over his car “debt” 5 times in the last decade.

    The best advice I can give is this: buy a recent model, LOW Mileage, PRACTICAL CAR (No luxury cars because wear and tear will cost an arm and a leg) and then drive it till its junk.

    Remember: Cars are made for people, people aren’t made for cars

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