Is leasing throwing money out the window?

Let me say that I’ve never leased a car in my life. Maybe it’s a throwback to my parents who would keep cars forEVER, or maybe it’s just the fear of making a bad financial choice. But that’s really the question here, is leasing a bad choice?

Let’s take a look at the major alternatives as they relate to young people.

Every PF’er will tell you that CA$H is the way to go. Of course, I agree with that wholeheartedly, and wouldn’t go any further in this post. But let’s face it. Most people won’t do that. Most young people just can’t do it. Here are a few reasons to do it:

– Zero (0%) per cent interest.
– No monthly payment
– You have title (complete ownership)
– More relaxed insurance requirements.
– You can “Pimp your Ride”. Many people don’t know this, but if you are financing your car, the bank owns your car. They usually don’t like people putting on lift-kits, expensive rims, or TV monitors. In fact, doing so could void your loan agreement, making the total amount payable on demand. If you pay your car in cash, this is not a worry.

So why would people NOT want to pay cash for their vehicles?

– They don’t have the money
– Some people finance their cars to help build, establish, or re-establish credit.

The second option is financing your purchase. In this scenario, you are buying a car, but using the bank’s money to do so. You pay a monthly payment that includes interest as well as principal, and at the end of the term, you own a car. This is what I usually do. I don’t mind making a car payment, especially since the car payments I make are very small. I don’t particularly care for expensive cars, and I like to put a hefty chunk down on the car. Some of the pros are:

– By financing your vehicle, you are building credit.
– If you are getting a really good rate, you could take money and save or invest it at a better rate.
o For young people, this is less of a benefit since you will probably not get the best rates.
– You can afford to make payments, but you might (probably can’t) afford to buy a car outright.

Some of the reasons against financing a vehicle:

– You are paying interest on something that is losing value.
– It is too easy to justify buying a car that you really can’t afford by justifying making the monthly payment.
– You are required to have added insurance on your vehicle for the term of the loan.
– In many cases, you have to get permission to take your vehicle out of state or out of the country for trips.
– You usually can’t modify your car in any way until it is paid off.

The final choice is to lease. Some people equate leasing to an extended rental agreement. I think that’s as good a definition as any, but it isn’t strictly accurate. When you lease a car, you are paying a leasing fee, and getting the option to buy the vehicle (at a reduced price) at the end of the lease or of turning in the car and getting something else. Of course, you lose any money you have paid into the car, but for some, this is not a deal-breaker. There are some advantages to leasing a car.

– The payments are usually significantly less than purchasing a car.
– You aren’t buying a car, so you aren’t buying a depreciating asset.
– If you don’t like a car, you aren’t married to it. Just turn it in.

Of course, there is a down-side as well:

– You are paying a lot of money for something you don’t own.
– You are limited to the number of miles that can be driven without a penalty.
– No matter how much money you are putting into it, at the end of the lease you have to almost start over if you want to buy the car (this is the residual or discounted price you get to buy the car at).
– Lease Buy-outs are a pain in the neck to do if you finance the buyout.
o You have to pay sales tax on the residual
o There is A LOT more DMV paperwork
o Many loan people at banks and credit union screw these up regularly.

Overall, for young people, I strongly urge to stick with cash. If that is absolutely not an option (and that is rare indeed), then I recommend financing a purchase. Leasing has its place; I just don’t think that place is with young people.

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