On the path to financial freedom you’ll hear a lot of advice regarding transportation. The standard advice is, if you need a vehicle, buy a car and drive it into the ground. Leasing a car is demonized. Famous and misguided financial guru, Dave Ramsey, says “leasing is fleecing.” I once suggested that someone in an online finance group consider leasing a car instead of buying and I was nearly run out of the group!
You might be surprised to hear that the Moneyaires don’t follow the conventional wisdom of buying a car and then driving it until the wheels fall off. We used to do this. It was an overall disappointing experience financially and timewise.
The 60k Mile Maintenance Surprise
I had just paid off my car loan a few months before Christmas. I was so excited to not have a payment. Finally! A few months after paying off my car, I took my car in for service. My assumption was that I would need to pay about $250 to $300 for the 60k mile maintenance work. I was wrong. The total bill came out to $900. Mr. Moneyaire and I were in a bit of shock. We had just paid off the car early for $4,000 a few months ago and were now getting hit with a huge maintenance/repair bill. As we walked out Mr. Moneyaire turned to me and said he never wanted that to happen to us again. I agreed.
Reliability and safety were paramount criteria for us because we both depended on a single car. Avoiding maintenance/service/repair fees was also key, as was a low monthly payment. Leasing seemed to be a great option for us because it checked all those boxes.
The conventional wisdom is to avoid leasing cars because it is an unwise financial move. The key reasoning: you won’t own the vehicle at the end of the lease.
Regardless, we started looking into leasing. As we started looking into leasing a vehicle, it seemed like a very practical way to go. Most FI orientated adherents come down on the side of buying a used car outright and driving it into the ground. We have a different take on that. We lease our car and we’ve been leasing for the better part of a decade. Many of our friends are surprised that the financially savvy Moneyaires would ever lease a vehicle instead of buying a second hand car.
A Method to this Madness
We lease our car because we find it much more cost and time effective than buying a car and maintaining it. Plus, because we aren’t tying up tens of thousands of dollars in a car we’ve invested the vast majority of that instead. We believe we’ve come out ahead.
Here are some of the common questions/comments we get about leasing vs. financing or buying a car outright.
Aren’t you throwing your money away by leasing?
No. The main argument against leasing a car is that you’re throwing your money away by leasing, much like if you rent your home. The argument against leasing is that you’ll never own your car so all those payments aren’t going to “pay off.” We lease a vehicle because we need a mode of transportation that is safe, reliable and pretty much maintenance free. Another critically important criteria for us is that the monthly payment be well under what we could afford and we don’t want to put anything down; we even roll taxes and registration fees into the monthly payment. We’d rather cash flow a leased vehicle to get us from point A to B and invest the rest.
We don’t want to own a car at the end of making payments. Car values most often depreciate over time. From my perspective if you own a car, it’s like owning a liability.
But after all those lease payments, you’re left empty handed?!
A lease is for a set period of time. We typically pick up a lease for 36 months at 12k miles a year. After the lease ends, we have the option to buy the car, lease a new one or turn it in. Most of the time, we’ll get a call or a letter from the dealer we leased from offering us the opportunity to return our lease early and re-lease a new car for the same lease payment.
We’ve never bought out a lease because we don’t necessarily want that car at the end. First, buying out a lease can be expensive. Second, the older a car is, the more maintenance and repairs it will need to continue to run. We don’t become attached to our cars. We don’t give our cars pet names. When a lease for us ends, we typically lease the same brand and model car, just a newer year.
A typical financed car deal lasts between 69 to 65 months according to caranddriver.com. After three years, most people who have financed a car, don’t own a car either. For those folks who do pay off a car within 36 or 48 months, they end up paying much more than we have in that time period. They also have an asset that is worth a lot less than what they paid for it. Cars are a depreciating asset.
Isn’t leasing really expensive?
It can be. Cars are expensive and leasing can be less expensive if you do it right. If you lease a car that you could easily finance and own, you’re doing it right. Leasing a vehicle means you’re typically paying less a month to use a car than you would to finance/buy it outright and own it. If you’re leasing a car that you necessarily couldn’t afford by financing or paying for it outright, it’s going to be expensive.
For us, it’s not very “expensive.” Leasing a car is typically cheaper than a monthly car payment. From our perspective, paying for a car outright or putting money down and financing a car for 36 to 48 months is really expensive. Instead of paying for a car upfront or making big monthly payments every month, we pay a lease with our cash flow and invest the difference. From our perspective, tying up tens of thousands of dollars in a depreciating asset is much more expensive because that money isn’t being invested. The key to becoming financially free is to have your money working for you.
Leasing gets a bad rap because many people tend to lease bigger or more luxurious vehicles that they wouldn’t necessarily be able to afford to buy or finance. This is because leasing is less expensive than buying. We lease a cross-over midrange Mazda CX-5 we could comfortably finance or buy outright. But let’s run the numbers to demonstrate how leasing vs. buying used stacks up.
Let’s look at leasing vs. buying a used car over a 5 year period.
- 7% rate of return on investments.
- Working with excellent credit.
- The lease would be for two 3 year periods.
- 12k miles are used per year.
- Insurance is comparable between the two vehicles.
- The lease costs $369 a month. $174 less than financing.
- The finance payment is $543 a month
After 5 years… these are our results:
|5 years leasing vs. financing of a $28k Vehicle||Leasing||Financing|
|Total residual value of vehicle||$0||$20,000|
|Investing the difference||$12,530||$0|
|Total Cost of Vehicle||$9,910||$14,080|
After we crunch the numbers, leasing doesn’t look too onerous. Now we do have payments that would continue for at least a year on the lease – another $4,428, however from what we were able to save and invest, we’ve got a nice $12,530 built up. If we continue to put $174 a month into investments, we’ll be doing quite alright. Plus, we have a new car versus a 5 year old car with 60,000 miles on it.
The math on buying a car outright or financing a used car would show similar results; leasing can be a better option if you save the difference and invest it.
Car Maintenance and Repairs… ouch
However, for the financed car that is now paid off – there are going to be big maintenance expenses coming up. At about 60k miles, you’ll need new rotors and brake pads, tires and you’ll need to have all the fluids flushed and replaced. These are just a few of the maintenance costs that would be coming up, not to mention repairs that may be needed. This is one of the biggest blind spots that most people fail to mention when they espouse the benefits of buying vs. leasing. Maintenance & repair costs, plus the time it takes to remedy them – it’s rarely part of the equation. According to a 2021 AAA study, maintenance on a car can run as high as 9.55 cents per mile on average.
Don’t you get screwed because of lease mileage limits?
How many miles we drive is actually a big reason why we choose to lease a vehicle. We typically drive under the 10k to 12k mileage limits placed on lease agreements. There are even high mileage leases available for those who drive up to 25,000 miles a year. These leases are more expensive, but could be a good option. Once a car starts nearing 75,000 to 100,000 miles driven, that’s when expensive maintenance and repair costs can start. Instead of being on the hook for these costs, it might make sense to turn that car in and get a new lease.
However, leasing doesn’t make sense for everyone, and it does not make sense for people who drive over 25,000/30,000 miles a year.
Review your mileage
The pandemic has changed where we are able to work. Mr. Moneyaire has been nearly 100% remote working from home. A lot of people who worked 100% remote during the pandemic may be able to continue working that way or working remotely more often than they did before. If you are going to be driving fewer miles because of the opportunity to work remotely a few days or all week, a leased vehicle with a mileage cap could be a much cheaper option for you.
Don’t you have to meticulously maintain a lease?
You do need to get regular oil changes, and whatever the maintenance guide says. But you’ve got a brand new car. There aren’t a lot of maintenance requirements for brand new cars. We haven’t spent more than a few hundred dollars a year on our leases. Most of that cost are for oil changes, a tire rotation, windshield wiper fluid and car washes.
One of the headlights on my lease once went out less than a year into my lease. I brought it to the dealership and they changed out the burnt out bulb, for free. They did this for me (and for anyone else) because a bulb on a brand new car shouldn’t just burn out. If things come up, typically they’re covered under the warranty. Even if they aren’t, like the lightbulb, they know I’m going to be in the market for a new lease in just a few years. They don’t want to lose a potential client because of a silly lightbulb.
The dealership encourages me to maintain my leased vehicle by offering free services, like oil changes and washes. I recently went in for the first oil change required for our car and it was free. Plus, they washed and vacuumed it out for me, too. Love it.
Also, the dealership is going to sell your lease when you turn it in (and don’t end up buying it). Yes, the dealership is going to most likely sell this previously leased car for a profit. But it saves me the hassle of trying to sell the car myself or debate over what the trade-in value should be. Also, I don’t need to go back to the same dealer to return the car and get a new one. The dealers know this and often have incentivized us to come back to them and we’ve even had other dealers give us big discounts to try them.
But you can’t customize the car
True – and we have no need for specialty custom add-ons. Buying extra stuff for a car to make it suit your personality, look cool or whatever – it just seems like a waste of time and money to us. We’d rather put that money towards vacations, home improvement projects and investments that could potentially cash flow expenses like our lease.
Isn’t insurance way more expensive?
We do need collision & comprehensive insurance on our leased car. Different states and leasing agreements may require different levels of coverage. When you lease a car, the company you lease from wants to make sure that if the car is a complete loss, they don’t lose money on it. This means they often times require leasees to have full collision and comprehensive insurance.
We most likely would choose to have the same level of insurance, if we financed or owned a car. Why? Cars are a depreciating asset. If we get into an accident or our car is flooded or whatever the case, we would want enough insurance to cover the loss. We’re in a lucky position to be able to cover the gap between what the car is worth and remaining payments and if necessary a replacement. However, if we weren’t we wouldn’t want to be caught owing money to pay off a loan for a totaled car and scrambling to pay for a replacement. If our financial position was different we would probably consider gap coverage or even replacement cost insurance if we owned a car outright, at least for the first few years.
Replacement and Gap Insurance
Gap insurance would pay the “gap” between what is still owed on the car and what the insurance company would pay out. Cars depreciate very quickly and the insurance payout for a totaled car may not cover the remaining balance on the car. If you finance a car, the amount you owe versus what the car is worth in the secondhand market, well you could be upside down. This means you owe more than the car is worth. Gap insurance would help make you whole in case your car is a total loss and you owe more than what insurance will pay out for it.
Replacement insurance means the insurance company would give you enough money to buy another similar car. This is a nice add-on to have if you’re purchasing a expensive car and wouldn’t necessarily have enough in cash reserves to buy or finance another car after you previous car is a loss. Insurance will cover the value your car was prior to being totaled, but that doesn’t necessarily mean the payout will cover the cost to replace the car, especially after having to pay the gap between what you owe and what the car is worth.
These additional pieces of insurance aren’t necessarily required but are a good idea to have if you’re worried about covering the gap between an insurance payout and what’s left on the loan of your vehicle or if you would need an insurance payout to replace a totaled vehicle.
Leasing isn’t fleecing
Leasing a car can be a very smart financial move if you take the savings and invest them. We’ve leased our family car for over a decade and don’t plan on switching tactic unless something about leasing changes making it too costly or burdensome.
Leasing makes sense if you drive lower miles, want to avoid maintenance costs, don’t care to own a car and plan to invest the savings. Investing the savings is the key component to making leasing a better option than owning a car.
We like being able to drive a brand new car that won’t need much maintenance or repair work. We get these benefits by leasing instead of financing to own or buying the car outright. It’s very comforting to not have to worry about upcoming maintenance we’ll need to take care of or repairs. The savings between leasing and financing that we enjoy has helped us grow our investment accounts. Sometimes its prudent to critically think about the conventional advice you hear – you might just end up coming out ahead.