A Fresh Look At Auto Leases: Does A Savings Account Help?

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Recently, a reader left this comment on an earlier post about the auto lease trap:

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?

In other words, what if you lease a fairly economical car and put the difference between the cost of the lease and the cost of a monthly payment on it into the bank. How would you end up?

Let’s use his Volkswagen Jetta as an example. I did some surfing for lease and financing prices on a 2007 Volkswagen Jetta. I found a wide range of prices based on various options, so I settled on a relatively low-end number of $18,750 as a price (with 2.9% APR, as found here). I also found repeated offers for leasing a 2007 Jetta for $199/month (like this one).

To make the calculations easy, we’ll compare buying the car with nothing down for 39 months versus leasing the car for 39 months. With the monthly lease, you’ll pay $199 a month for 39 months, then have no asset at the end, paying a total of $7,761, but you also have to have $1,200 down and a $575 acquisition fee due at signing, bringing your total price to $9,536. If you average out that additional cost over the life of the loan, your effective monthly payments are $244.51. On the other hand, with the monthly payments, you’ll pay $504.36 a month for 39 months and still have your Jetta at the end, paying a total of $19,670.04.

If you lease the car, you can dump that extra $305.36 a month into a HSBC Direct savings account and earn 5.05% interest on it. After 39 months of doing this, you’ll have $10,966.81 in that account. This may or may not be enough to buy a late model used car – but it will be fairly close. Better yet, at the end of the lease, you have the option to buy the Jetta for $10,687.50, which means you can pocket the difference (in theory – finish reading this article).

On the other hand, if you don’t lease the car, you completely own your Jetta after 39 months while it is still covered by warranties.

At first glance, the two deals seem fairly similar. In both cases, you can wind up with a Jetta that’s yours after 39 months, and the actual money you’re obligated to pay is within a couple hundred dollars of each other. However, once you read the fine print of the lease agreement, it becomes clear that a leased car isn’t as good a deal as buying your own car. To quote from vw.com:

At lease end lessees responsible for $0.20/mile over 39,000 miles and for damage and excessive wear. Additional charges may apply at lease end.

For every 1,000 miles you drive it over the 39,000 you’re given over the length of the lease, you’re dinged $200. For every little ding or scratch that the dealer finds on the car when you return it, you’ll be dinged a little more. Not only that, “additional charges may apply at lease end” doesn’t sound too promising, either.

In short, even if you get a great lease deal and you put every dime of the money you save under a car payment into a savings account, you still get a raw deal with a lease. The best deal of all, of course, is to pay cash, but if you’re going to buy a car you can’t pay for immediately, leasing is simply not the best deal.

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25 thoughts on “A Fresh Look At Auto Leases: Does A Savings Account Help?

  1. But surely if you’re keeping the car, you don’t hand it back in and you don’t pay extra for any extra mileage or scratches.

    Unless I’ve misunderstood of course.

  2. You shouldn’t go into an auto lease with the intent to purchase at the end of the lease. You will pay more. The lease is based off of MSRP. Also, the benefit of a lease is to reduce your cost burden of depreciation, which you negate by purchasing at lease end. if you do decide to purchase at lease end, you also need to factor in the loan to purchase the car. Since it is a used car at that point, used car interest rates are higher than new car rates. Normally, at 3 years is when you break even in a car’s used value compared to remaining loan. If you buy at end of lease, you are starting a loan on the car that is greater than its used value. Moreover, insurance on a leased car is generally higher. Also, since dmv fees are based off a cars depreciated value, a new car will have high first year, but will level off. For leased cars, since your depreciated value during the lease is lower than the purchased car, you will have a higher second yr and beyond fees.

  3. Just to add to what Tim said about reducing cost burden of depreciation, a vehicle generally depreciates at between 15-20% per year (according to bankrate). So at the end of 39 months if you had purchased the vehicle it might be paid off, but you’re left with a vehicle worth only about $8,000-$9,500. So you will have paid close to 20k for a vehicle that ends up being worth less than half that after you’re done making payments.

    With the lease, assuming you have no intention of buying the vehicle at the end and you keep your mileage within the lease agreement you can save money. Granted you don’t have an ‘asset’, but that money tucked away in a savings account adds up to quite a bit of money that becomes an asset. So if you continued to re-lease cars and always invest the difference it could save quite a big in the long run.

    I sort of view the lease/buy issues much like life insurance. You can buy term and invest the difference, leaving you with at least a policy but no asset, or buying whole life which costs more, but gives you an asset as well. In each situation there can be places where either could be appropriate.

    The way I see it is regardless of buying or leasing, new vehicles are one of the biggest wastes of money out there. Both methods require you front money for a rapidly depreciating asset, not to mention all the additional items like insurance, plates, etc.

    Don’t be a sucker, buy or lease a car that is a year or two old. Let someone else lose most of the value on the new car and you can reduce your payments as well as avoid the premium you pay for having a car that is “new”.

  4. Jeremy has a good idea. Factory-certified used cars are becoming very popular nowadays. Most of them are cars that were leased and then turned in.

    Some manufacturers (I believe BMW is one, don’t know about the others) offer the full range of financing options on certified used cars, including leasing.

  5. The lease termination price is always negotiable. Plus the purchase price at the end is often better than a similar used car on the marketplace. However, if your sole goal is to lower payments, take a 5 year loan on a new car. You will own the car, have a predictable schedule and interest rates (which are likely to rise) will be mitigated.

    HOwever unless you HAVE to have a new car, buy used. I picked up a 6 year old mercedes (original cost 38k) for 8. Sure, it isn’t “new”, but runs like new, drives better than most new cars, and will last another 100k miles. I will probably keep it for 2 years and then sell it for just under 7 grand. $40 a month in depreciation isn’t bad.

  6. michael, many offer financing options for certified used cars; however, like in a new car financing, you should have something pre-approved prior to going to the dealership so you have some negotiating leverage. “certified” means many different things to many different dealerships, so you should do your research as you would any other used car. With that, the benefit of a certified or any other car that is 1-2 years old is the factory warranty and/or extended warranty that comes with it. Luxury cars like bmw, extend manufacturer warranties and maint plans out to 6yr/100k miles, which is darn good.

    Jeremy, yes and no on leasing. generally, even in a lease, you are going to be spending more on the car than if you bought it outright. This is because you have the value of the purchased car, versus having nothing after a lease. However, if you are of the opinion that you will always have a car payment, then leasing is a viable option if you can maintain under the mileage limits of the lease. I would direct a pretty good analysis between used, new, and leased car at edmunds.com.

  7. one last thing, most people who get a lease do so because they can get a more expensive car for the same or less monthly payment as a car that they could afford to finance and purchase outright. This is like interest only mortgages. The problem I have with leases is the fact that you are aspiring to live beyond your real means.

  8. That’s what both of our “new” cars are that we just bought over the past year. We sold my wife’s car and used the proceeds to almost entirely finance a year old vehicle that was “certified”. Even though it had 30k miles on it it still came with quite a bit of factory warranty left.

    Same for my car, it was about 2 years old and had 40k miles on it. Again certified and had a little bit of factory warranty, and for a few bucks a month we added a few years to the warranty.

    We ended up with about $60k worth of vehicles (as they were priced new) for about a purchase price of $36k. After the trade-in we only had to finance about $20k for two nearly new vehicles with warranty. The only difference is our odometer didn’t read 5 miles on each vehicle when we bought them. And not to mention the money saved on insurance and registration by not being brand new.

  9. I have done this twice, where I leased a car for 2 to 3 years and then bought it out. The reasons to do the buy-out may be because you are way over on mileage or because there may be damage that would be too costly to fix and turn back in, or because you just want to own the car. There is a set depreciation amount that is in the lease that says how much the value of the car goes down, each time a payment is made. So, you could even determine the right time to buy-out the leased car and sell it yourself and make some money if it has more value than what you paid for the buy-out.

    Further, you can negotiate the price of any new or used vehicle, and THEN determine how you want to pay for it. In other words, get the best starting price and go from there. Lease it, or buy it. But, negotiating the starting price is always in the consumers hands.

    There are many angles to take here and there no one answer that is right. Advising that way is really dangerous and very wrong much of the time.

    It really depends on how good of a deal you can negotiate, how good of a price you can get for the extra miles, how much cash you can put down, how much of a monthly payment you can afford or want to pay, and if you plan on having payments for a vehicle forever or if you eventually want to have no payments and to own the vehicle. There is no simple formula in that regard.

  10. Trent/Angela: I think Angela was right. My experience has been that you don’t pay for mileage if you do the buy-out, nor do you pay for damage. That’s only if you turn the car in, not if you do the buy-out. BUT, there may be other lease arrangements out there that really rip people off. In those cases, I wouldn’t touch ‘em.

  11. I should point out that in the example above, I used a spectacular lease arrangement. As the original comment stated, a typical lease for a Jetta is about $50 a month higher. I tried very hard to do everything here to give the lease the benefit of the doubt and didn’t give any real “best case” at all for buying – and leasing still wasn’t a good deal.

  12. “The best deal of all, of course, is to pay cash…”

    Not necessarily…often the loan rates offered by car dealers is so low that you’d be better off financing. For example, if the dealer will loan you the money for the car at 2.9% (or even 0% occasionally) you’d be better off investing the cash in any way that earns more than what the loan is costing you. That 5.05% you mention in the post would be a gain of 2.15% on your money.

  13. No Trent. Offers such as that occur when you ask for them and have credit that qualifies you for getting those deals.

    When buying a new car, a dealership makes very little to no money off the buyer, unless the buyer pays too much. They make most money from manufacturer specials, rebates, selling add-on items and warranties, and then from service.

    The special low rate financing deals are usually done via manufacturer financing and are tied to picking from dealer stock. I have never noticed any that are tied to paying the inflated MSRP.

    I always negotiate the price and then tell the dealership how I want to deal with finances.

  14. Toby, several manufacturers offer incentives in the form of an interest rate reduction OR a upfront rebate. GM is one of those currently. At the end of 2006 you could choose between 0 percent APR or 5000 off.

  15. I think if you do the numbers, you will find tht you should NEVER go into a lease with the intent of purchasing at the end of the lease. The fact is it will cost more in the end.

    Toby, I will concede that you cannot put a simple formula on anything; however, in your analysis, you have forgotten that you can negotiate the purchase cost of a buy it out right car, too. Yes, you can negotiate terms for a lease, but the terms will be higher than for a buy it car. Why? For the sole reason that the vast majority of leased cars are not purchased at the end of the lease. Because of this, the dealer now has to put money into and recoup money out of the leased car in order to sell the vehicle. The dealer does not have this concern with a buy it car.

  16. This is good discussion and helpful info. I am learning. But, mostly what I am seeing is that for myself it really is very hard to give blanket advice or to hear and apply blanket advice. Maybe I’m just nitpicking based on my own personal experience.

    jay s: Yup, that’s exactly what I mean. Those are manufacturer specials, not dealership specials.

    Tim: No, I did not forget “that you can negotiate the purchase cost of a buy it out right car, too.” That is exactly what I meant by saying, “I always negotiate the price and then tell the dealership how I want to deal with finances.” Telling the dealership how you want to deal with finances, after you have negotiated a price allows you to start with the best price and to go from there, and to pay cash or do a loan or do a lease. In very simple terms, a lease is usually a balloon payment at the end, and a loan is usually a balloon payment at the beginning. They can be structured in various ways, and they both have depreciation costs and finance costs. I don’t agree with saying that “you should NEVER go into a lease with the intent of purchasing at the end of the lease.” Sure it may cost more in the end, but finances are not always about which things cost more or less. There are also timing issues. I may have many reasons for wanting to go with a lease. It could be because of business arrangements and how much a business is going to pay for a portion of the lease. It could be because I know that I have other financial obligations at the begginning of the lease that I will not have later, and this allows a way to structure the car deal within the parameters of my needs, etc.

    I just think that giving blanket advice about many things (like car lease versus loan) is dangerous. I think it is a much better route to help educate people to find out what is important to them and to find out what their own needs and capabilities are financially. Then people can make better decisions. I think people need help trying to make better decisions, not help being told what decisions to make. Blanket statements often totally screw people out of good deals and often are very misleading to a lot of people. They may be good for “most” people, but there is still a lot of decision making happening with the rest of everyone out there.

  17. Toby: that’s exactly why I walked through the calculation above. I used a real world example and then gave every bias I possibly could to the lease and still couldn’t find a clear, compelling reason to go for the lease. I left out many factors, such as the fact that auto insurance is higher on a lease, and even without those, the lease really can’t compete.

    Leases exist to get people into cars they can’t really afford, and for that “service,” you will pay. There is no such thing as a free lunch.

    If someone can show me clear evidence of a situation in which a lease is substantially and clearly better than buying, I’d be glad to retract my advice. The problem is that they don’t exist.

  18. I think another huge point that may be missed here is that dealerships usually do not do most of their own financing. They do not do most of their own leases and they do not do most of their own loans. Those are usually done through other parties. If they do their own financing, it is because that is a separate business decision by the dealer to be in the financing business and to carry a credit of cars out on lease. That is a business model, but I don’t think it is the most popular when people say the word “dealership” and they mean going to the Ford or Toyota or Whatever dealership down the road.

    So, even when you lease a vehicle and “return it to the dealer” at the end of the lease, there really is a set of transactions between the financing party and the dealer. Most times the dealer is not the financial portion. That’s why most times there is a separate finance office that has various options for you, and also why they offer more add-ons and other sales things when doing that deal. They may be employed by the dealership, and trying to make money for the dealership, but they are usually routing the finances of the deal to an outside party.

  19. Trent, I am one of those people who dissects the deals and decisions and really tries to make a good decisions. That’s very much what your site and this post is all about. Very cool!

    Here is at least one example of clear evidence of a situation in which a lease is substantially and clearly better than buying. This is one example, but a very, very popular one. I prefer new cars over used cars. I prefer the fewer headaches and fewer stresses that come when I buy new, versus when I buy used. So, the first few years of car ownership of a new car for me, have always been the best. I place a financial value on that reduced stress and reduced time to manage that while I own (or lease a vehicle).

    Here is another example. If a business gives cars to it’s salesforce, they are likely new cars. To keep them new and to manage finances wisely, leasing the vehicles makes the payments lower in the short term and in the long term – unless the business also wants to get into the business of buying their own fleet of cars and then selling it later. That is usually not a wise decision for most businesses that are not in that market and that is not their core competency.

    I am making this way more complicated than I should, and probably distracting from the simplicity that you are going for. That’s my bad. I am a huge fan of simplicity, and I have totally broken my own normal thought model here with my comments on this post. :(

  20. Well, in your first example, you’re flat-out saying you don’t mind paying more because of your own aesthetics. That has nothing to do with personal finance, that has to do with wants and desires. It’s no different than someone who shops at Tiffany’s because it makes them feel better about what they buy. When you try to justify things with aesthetics, comparing such things dollar to dollar is useless.

    In the second example, that’s a business situation, not a personal finance situation. There are reasons for a business to lease that are simply not applicable to an individual.

  21. Once again, The Simple Dollar makes much more sense than the complex, long winded, aesthetic dollar. Trent, you’re right.

  22. i think that is so funny that your responded to my comment with an article. I decided instaid to buy a used jetta because I want the TDI model you won’t be able to get next year. your website reminds me of a very good “how to get dugg” tutorial.

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