Have you ever seen someone who seemed to always be driving a new car almost every other month? I had a few friends like that right after I graduated college, and always wondered where they got the money to get into the flipping cars game. They’d have the newest of the new models of the most popular cars. Meanwhile, there I was driving my 10-year-old Honda Accord with over 100,000 miles, an air conditioning system that only blew hot air, a driver side window that wouldn’t roll all the way down, and a passenger side door I could only open from the outside.
As I got older, I saw that many in the flipping car game were still living at home with their moms because they couldn’t afford to move out. On the other hand, I was operating my own company while living on my own in New York City. They were leasing their cars, while I’d owned mine outright. When it came time to investing in my new business, that lack of a car note made a huge difference. There’s a huge difference between leasing and owning your own car, and since I’m a strong advocate of the ownership mindset, let me explain the advantages of owning your car as opposed to leasing it.
When you lease a car, the two main charges are the depreciation charge and the finance charge. The depreciation charge is the price that the vehicle has gone down while you were using the vehicle. The finance charge is the interest rate you’re paying on the term of the lease. Nothing goes towards anything of real value to you. Depreciation is only an accounting expense, which just so happens to be the most costly in the earliest years of the vehicle, which just so happens to be the time that you are leasing the vehicle.
Cars depreciate 25% as soon as you drive them off of the lot. If you purchased a car for $20,000, as soon as you drive it off the lot it’s only worth $15,000. This is why those millionaires who really understand the value of a dollar will purchase a pre-owned vehicle (1-3 years old) that’s already taken its biggest hit of depreciation. It’s also why you’ll never hear of them leasing a vehicle, because they understand the value in ownership and renting.
I’m not saying that there are no benefits to leasing a vehicle. If you lease a car, you’ll probably have lower monthly payments. They require little to no down payment upfront; you’re never in a position when you owe more than what the car is worth; and if you’re a business owner, you may be able to get some tax advantages if you use the car for business purposes. I get it.
However, most people who lease vehicles go for years always having a car payment and not having anything to show for it but a lower savings account. Depending upon the type of lease you have when your lease term is up, either you hand the keys over to the dealership and lease another vehicle, or you finance the remaining value of your car to work towards owning it, and go from lease payments to loan payments.
And the deal you thought you’d get if you decide to purchase the vehicle after your lease contract is up? It’s never as good as you thought it would be. Because in a lease, the most expensive portion of the payment you’re paying for is the high depreciation expense, and very little (if nothing) towards the value of the vehicle.
Other disadvantages of leasing are as follows:
- Terminating the lease can be very costly
- You don’t own the vehicle, so you can’t make any major changes to the car, paint it, or add equipment to it
- Mileage restrictions and putting too many miles on the car can be very costly if you go over the allowed limit
- Insurers usually charge higher coverage costs for leased vehicles (their reasoning: if you don’t own the car, you’re less likely to take good care of it than someone who does)
When you lease a car, you’re essentially committing to a lifestyle of renting your car, which ensures you’ll always have a car note. Wouldn’t it be nice to purchase your brand new vehicle with a five-year note, pay it off in three years, and save the amount you would’ve been paying towards a car note for the final two years into a savings account? Little tactics like this over a lifetime add up towards a fruitful retirement, where you can enjoy your golden years without having to work for the golden arches.