In general, I’m pretty strongly opposed to the idea of leasing a car. In most situations, a car lease is a long-term financial mistake. Compared to a cycle of buying late model used cars and driving them to their replacement point, auto leasing is very expensive.
Still, there are exceptions to every situation. A recent Reader Mailbag question, in which a reader was struggling with a particularly peculiar lease situation, led me to realize that there are, in fact, situations where a lease might make more financial sense than buying a car.
Mostly, these situations revolve around turning elements that might be negatives regarding leases into positives. Note that this is a might – you’ll want to simply take a closer look in these situations and buying is likely to still be better.
Let’s take a look at three of them.
Let’s say you’re going to be working in an area for just two or three years, then leaving that area permanently. You might even be moving to another part of the world. In a situation like that, owning a car at the end isn’t necessarily a positive thing, as you’ll be forced to sell it in a relative hurry. Plus, the first two or three years of a car loan are the years where you’re most likely to be underwater on that loan, so you might not even pay off the car with a sale.
Naturally, this is trumped if you can pay cash for the car without strapping yourself, as that will likely be the best option.
International workers or students who may not be staying permanently in a country should figure the total cost of a lease compared to taking out a loan for a used car.
Factory Overstock Leases for a First Car
On occasion, manufacturers who are sitting on a glut of cars that need to disappear quickly will significantly drop prices on those cars in order to get them out of the way for the newer models. This includes both sale prices and lease prices.
If you’re willing to carefully wait for the right sale, you can sometimes find absurdly good lease deals, ones so good that it makes more sense than taking on a car loan. I’ve seen leases from local dealerships for new cars under $140 a month (like this one) and I swear I’ve heard of leases under the $100 mark in the past few years.
For a late model used car – worth, say, $10,000 – a five year loan at 3% per year requires you to pay $180 a month. Considering that even a late model used car depreciates awfully quickly during the first few years you own it (not as bad as a new car, but still pretty quickly), it will take a couple of years for you to get your head back above water on such a loan.
If you’re willing to sock away the $50 to $80 a month you could save on a exceptional lease deal compared to a late model used car, then you use that $2,000 to $3,000 in savings as a down payment on a car at the end of the lease, you can wind up ahead here. However, you need to be willing to save that $50 to $80 a month during the lease (and preferably more) and stick to the terms of the lease, then buy a late model used car (maybe even your leased car) at the end of the lease.
If you’re in business and planning to use the car almost entirely for business use, leasing can make more sense in many cases. Tax laws allow businesses to deduct the monthly lease payments on their taxes, which can make the math very tricky, but it does make leased cars viable in certain situations.
If your business situation is such that you have need for an automobile, this is a discussion you should have with your accountant. You may find that leasing the car for the business (with a small fraction for personal use) might make the most sense depending on the taxes in your state and other factors.
The best method for squeezing every nickel out of a car while still enjoying highly reliable driving is to buy a late model used car, paying entirely cash, then driving it until it’s no longer reliable and then trading it in (or selling it) to reduce the price of the next car purchase. It may be acceptable to borrow money for a “first” car to start this cycle if you don’t have a lot of money in the bank, but you should invest in an older car at that point and start seriously saving.
If you pay $10,000 for a late model used car, get eight years of driving out of it, then sell that car for $2,000, you’ll only need to save $80 per month to get there. No lease restrictions, no tricks.
Leases only make sense when there’s something unusual about the situation. Otherwise, a late model cycle is the best option.