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

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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