More than once on this site, I’ve argued on behalf of renting instead of buying a home. Renting comes with a number of financial advantages, not the least of which is that it’s far cheaper per month than owning your own home. You’re not responsible for homeowners insurance, property taxes, property maintenance, or any of those other expenses. You’re just responsible for the rent, and that adds up to quite a bit less per month in most situations.
Yet, at the same time, I’ve regularly discouraged people from leasing cars in almost every situation. Leasing, after all, is much like renting – you pay an amount each month for use of the car over an agreement that last three years or so.
Why would I be in favor of renting a home but be opposed to renting a car? Shouldn’t the same principle apply to both?
Actually, it’s the differences between buying and owning a home and a car that make renting a home make sense in a lot of situation but rarely makes leasing a car make any sense at all. Buying a home and buying a car are not even close to the same thing, so it’s very useful here to look at the differences between the two to see why renting your living space can be a smart idea while leasing a car rarely is.
First, leasing only seems like a discount compared to buying a brand new car, but it looks pretty bad compared to buying a used car. When people look at the price of a lease, they usually compare it directly to payments on a new car and, by that comparison, a lease is usually a cheaper option. However, both options pale in comparison to buying a late model used car, which usually comes with a much lower sticker price and thus much lower payments.
On the other hand, renting seems like a discount compared to most avenues of home ownership. Factors like square footage and location are much more important when it comes to the pricing of a place to live than how old or new the place is. Regardless of the place, the cost of renting is almost always significantly cheaper than the total monthly cost of ownership with a mortgage.
Second, leasing a car does not free up money each month with which to do other things, compared to simply buying a car. That is, unless you’re buying a new car on payments, which is probably the worst financial decision you could make regarding an automobile purchase. The cost of insurance on a leased car is comparable to that of a newly purchased car as well (hint: it’s high).
Buying a late model used car will usually result in a lower sticker price, lower payments, and lower insurance rates. All of those things will save you money, freeing up money for things like investing, saving for the future, and paying off other debts.
On the other hand, renting a place to live usually does free up money versus buying a place to live. That’s because the total cost of renting is virtually always quite a bit lower than the total cost of home ownership for a month once you add in things like property taxes, insurance, maintenance, and so on.
Here’s the real scoop: leasing only makes sense if your only other car buying option is a sequence of new cars that you replace every three years. Otherwise, it just doesn’t add up, and it certainly doesn’t compare to the relative benefits of renting a place to live versus buying a home.
So why would a person ever lease?
The real reason most people lease a car is because, at least in part, they view it as entertainment. It brings them a certain amount of additional pleasure when they drive somewhere or when they think about it. They enjoy showing it off to others and they enjoy it purely as a creature comfort.
Yes, it does provide transportation, and particularly for a person who doesn’t own a car, that does have some value. However, part of the monthly lease payment for many people is an entertainment expense.
(For some, there’s also a belief that a new car can impress clients and customers, so they view a lease as a good business expense as it’s the cheapest way to get themselves behind the wheel of a new car. In those situations, a car is purely a business expense, which isn’t something we’re talking about here.)
In my eyes, the concept of excessive purchase to fulfill a need is actually an entertainment expense makes a good deal of sense in areas far beyond a car lease.
Take a large home, for example. When someone buys a 4,000-square-foot home, they’re not simply buying it to meet their basic housing needs. They’re buying it for other reasons – to impress others or to bring about personal pleasure.
When someone buys a huge television, they’re not buying it so that they can keep up with the news and with local weather reports. They’re buying it to impress others and to bring about personal entertainment and pleasure.
When someone buys a big set of high-end pots and pans and cooking utensils and knives for their kitchen, they’re not buying it so that they can prepare a simple meal. That could be done with pretty inexpensive equipment – good basic pots and pans and great chef’s knives don’t cost very much. Instead, they’re buying these items to impress others and to bring about extra personal entertainment and pleasure.
When someone buys a high-end appliance, like a giant refrigerator with a bunch of amazing features, they’re not simply buying it so that they can keep their food cold. A low-end fridge will do that. They’re buying those appliances to impress others and to bring about extra personal entertainment and pleasure.
In the end, the exact same thing holds true for leasing a new car. In the end, most of that expense is actually an entertainment expense, something bought mostly to bring you pleasure and perhaps a little bit to impress others.
In terms of impressing others, stop spending your money to impress other people. The reality is that they don’t care as much as you think they do. It’s a common psychological trick your mind plays on you called the spotlight effect. Don’t let the spotlight effect alter how you spend money.
What about for personal pleasure and entertainment? There’s nothing wrong with that, either, as long as you’re honest about it and budget accordingly.
If you’re signing up for a $299-a-month lease when you could have bought a reliable car for $150 a month, are you counting that extra $149 a month as an entertainment expense in your budget? If so, are you cutting back on other forms of entertainment, or are you just expanding your entertainment spending at the expense of saving for the future or other financial goals?
This is the kind of question you should ask yourself not only about leasing a car, but about all of those other “larger than necessary” expenses I mentioned above.
Is that more expensive refrigerator with all of the amazing features really worth it when you could have bought a reliable entry-level model for half as much? If it is, did you cut back in other entertainment and pleasure-related areas in your life to account for it?
What about that expensive television? What about that big house? How do they compare to the other big goals you have in your life? Would a less expensive television or a smaller house fit the bill?
In the end, let’s bring it all back to car leases. When you decide to lease a car (or buy a brand new car), you’re essentially asking those same questions of yourself. Given that the lease is at least in part an entertainment expense, how does that extra entertainment expense compare in importance in your life to things like achieving your personal goals?
Keep those questions in mind with every big purchase you make. Is this purchase really a need? Or is it a need with a healthy dose of “want” tacked on so that you can excuse the entertainment expense? Remember, whenever you make a choice like that, you’re choosing to walk away from your big life goals for it.