The Simple Dollar is running 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.