2

I'm aware of the usual pitfalls of leasing a car (I found this question very helpful) and I know the general rule is that if you can't buy the car in cash, you can't afford it. However, I need a new car within the next several months.

I don't/won't have enough saved up to be able to pay cash for a better car than what I drive now, which is not technically mine (and so can't be used as a trade in). I will have enough for the signing fees for a lease (say $2000 due at signing, with a $200 monthly payment, and buyout of $18000 at the end of the lease period).

My question is this: If I already know that I intend to purchase the car at the end of the lease term, and the lease payment is low enough that I could pay it and save at least $100 extra every month to put towards the purchase of the car, is leasing still a bad idea?

If I have ~$4000 saved by the end of the lease term, then I should only need to finance ~$14000. $14000 in three years for a "used" car that I've had since it was brand new seems much more reasonable to me than $30000 for a brand new car now. I know I cannot afford the new car now, but I'm very sure that I'll be able to afford the "used" car in three years.

Does this plan seem like a reasonable way to proceed, or a big mistake?

Dheer
  • 57,070
  • 18
  • 88
  • 169
senschen
  • 121
  • 1
  • 5
  • Have you calculated the total cost of your plan (lease for 3 yrs then a loan for 14K)? Have you compared that to getting a loan with a monthly payment of $300? The second option would not enable you to get /as/ expensive of a car, but at least you could afford it. – VBCPP Apr 18 '16 at 15:28
  • @VBCPP "... but at least you could afford it." How do you figure that I can't afford what I'm suggesting? The extra $100 that I would put aside along with the lease payment is not the only money I would be saving-- its not like I would be pouring every dime I had into this car. – senschen Apr 18 '16 at 15:46
  • Why do you "need" a new car, rather than a used car that you could buy for whatever cash you have on hand? – jamesqf Apr 18 '16 at 16:56
  • @jamesqf I mentioned this somewhere below, but I would prefer to have a car that I could keep for its entire lifetime (which should be a very long time, barring accidents), and which I would not want to replace/upgrade for mileage or performance reasons (not for shiny new features) within the next couple of years. I'm aware that this is not a need but it is my preference. I doubt very highly that I could buy a better car than what I have now for the amount of cash I could come up with, so I would be in the same position in another year or so. – senschen Apr 18 '16 at 17:28
  • The lease is structured so that the dealer will always recoup at least the depreciation on the car over the lease term, usually a good bit more. Put another way, if you could save money by leasing first, they wouldn't be offering you that lease :) – hobbs Apr 18 '16 at 17:59
  • 5
    Have you looked into buying a car that is a couple of years old, likely just came off of someone else's lease? If you are planning on buying that would get you past the biggest drop in depreciation and still keep you in a "newer" car. For instance we just picked up a '14 that is identical to the '16 they are selling new and saved basically half the price $15k vs $28k. At the end of the day a car is an emotional buying decision, you need to just reflect on what emotions are driving your choice, and work from there. – Ukko Apr 18 '16 at 18:14
  • @hobbs I figured on that. I'm not so much trying to save money over the total purchase of the car (lease + buyout) as I am trying to make sure I don't stretch myself too thin. I'm young, and don't have much of a savings built up yet-- but if the car payment isn't too much per month I'll be able to both have the car and save up. That way I'll need as little financing as possible when the lease term is up, and I'll have a car I won't need to pay on very long, but that I know is good and should still be good for a number of years. – senschen Apr 18 '16 at 18:15
  • @Ukko Yes, I'm considering that as well. I admit that part of this particular idea is an emotional thing-- I'd like to own something brand new, that I picked out, that I can keep for as long as I want it. Not that I'm going to let that stand in the way of good sense, of course, which is why I asked the question. :) I wanted to see if this was as viable/not boneheaded idea as I thought it was. – senschen Apr 18 '16 at 18:20
  • @senschen: I can understand wanting to keep the car for a long time - heck, I've got an '88 Toyota pickup that I use for hauling & unpaved roads (which are common hereabouts). I just don't think you are any more likely to get that from buying new than spending time to find a good used one. – jamesqf Apr 18 '16 at 19:55
  • 1
    @senschen We did what you are describing once and it worked out, but that was a special case. At the time Chrysler was having internal problems and they needed to move some minivans and we took advantage of them. Also do you have real lease/purchase rates to work from? If not go talk to the finance department and see what sort of rates they will give you personally with your credit and income. There is a bit of bait-and-switch in that a young person will not qualify for the advertised rate on either the loan or the lease. – Ukko Apr 18 '16 at 20:10
  • I think you missed a zero in 1800$. – Yakk Apr 18 '16 at 20:56
  • New cars lose a massive percentage of value instantly. Unless you have money to waste there is no reason to buy a brand new car over one that is a couple of years old. Plus you have the added knowledge that you are not buying a lemon by looking at the service history. – JamesRyan Apr 18 '16 at 23:02

3 Answers3

5

You are still paying a heavy price for the 'instant gratification' of driving (renting) a brand-new car that you will not own at the end of the terms. It is not a good idea in your case, since this luxury expense sounds like a large amount of money for you.

Edited to better answer question

The most cost effective solution:

Purchase a $2000 car now. Place the $300/mo payment aside for 3 years. Then, go buy a similar car that is 3 years old. You will have almost $10k in cash and probably will need minimal, if any, financing. Same as this answer from Pete: https://money.stackexchange.com/a/63079/40014

Does this plan seem like a reasonable way to proceed, or a big mistake?

"Reasonable" is what you must decide. As the first paragraph states, you are paying a large expense to operate the vehicle. Whether you lease or buy, you are still paying this expense, especially from the depreciation on a new vehicle. It does not seem reasonable to pay for this luxury if the cost is significant to you. That said, it will probably not be a 'big mistake' that will destroy your finances, just not the best way to set yourself up for long-term success.

Community
  • 1
jkuz
  • 3,970
  • 1
  • 12
  • 22
  • I appreciate your suggestion, but that does not address the fact that I need a car to drive in the intermediate 3 years. If I had the time to wait and save for that long I would, but I don't. – senschen Apr 18 '16 at 15:10
  • @senschen you are right, it does not address that, but I think the overall suggestion is correct. The problem is how much can you finance a car for, and/or are you willing to go with a used car that works for that time frame while you save money? – dakre18 Apr 18 '16 at 15:39
  • I should note, that when I say the overall suggestion, I am talking about jkuz's point about not leasing the car, and instead work at buying one instead. – dakre18 Apr 18 '16 at 15:41
  • @dakre18 I agree that overall the suggestion would be correct, but since it doesn't address the specifics of my situation, that doesn't make it helpful/useful to me at all. If I could do that I would, and I would never have asked the question. – senschen Apr 18 '16 at 15:44
  • @senschen Sure I understand that, and I already said i agree with you about it not being helpful enough. However, what about the option of buying a cheap used car to use for a few years? Even if you have to finance some of it, that would give you the option to save with a risk of repairs (depending on the car). – dakre18 Apr 18 '16 at 15:47
  • @dakre18 I could do that, and I suppose I might (I'm nowhere near a decision on the whole situation) but I was hoping to have a car that I could keep for its entire lifetime (which would be a very long time, given the reputation of the car I'm looking at, barring any unfortunate accidents), and which I would not need/feel the desire to replace or upgrade (for mileage/performance) within the next couple of years. There's also a personal feeling of not wanting another hand-me-down, but I'm willing to put that aside if necessary. – senschen Apr 18 '16 at 15:52
  • @senschen Makes sense, but if you can't finance the car you want, you may want to go that route. Leasing would just be throwing money away, while a used car gives you some resell value (even if they try to screw you on the amount). That would make jkuz's suggestion work, as you would have some money saved up for the car you want (even if an older model) and gives you a car to use then trade-in/sell. It's not a great plan, but it works. – dakre18 Apr 18 '16 at 15:57
  • @senschen my apologies, I assumed from your question that there was no set timeline for purchase and that you did not have to replace your current vehicle immediately. It seemed that this was discretionary. I can update the answer if you can clarify your timeline. Thanks – jkuz Apr 18 '16 at 16:35
  • @jkuz As the question says, within the next several months (December/January timeframe at the latest). – senschen Apr 18 '16 at 16:42
  • @senschen you're right. Missed that. Sorry, edited. – jkuz Apr 18 '16 at 16:59
  • 4
    Am I the only one who questions whether or not a $2k car is going to be able to provide reliable transportation for the next THREE YEARS? Unless you're already a car expert (and even then, I know mechanics who have had project cars that turned into money pits). It seems awfully risky to me - if you have 2k and spend 2k on a car that suddenly needs $700 worth of work on it, how do you get to work? – Rob P. Apr 19 '16 at 02:19
  • @RobP. That's exactly my thought, and the reason I was hoping to avoid buying used (more than a couple of years old, anyways). I have mechanic friends as well, and even if they do stuff for me for the cost of parts, that can still get expensive. At least with a new car there's a warranty if anything goes wrong. – senschen Apr 19 '16 at 11:16
  • @senschen Be careful of comparing two extremes as your only options. I suggested $2000 simply because you indicated that is the cash you had. Anything in-between a $2k car and financing a late-model used car will be more cost-effective than leasing a brand-new vehicle. What is 'reasonable' in this case is up to you and what you can afford/tolerate. Total cost of ownership is always lower on an older car, and ANY vehicle can be a lemon. – jkuz Apr 19 '16 at 12:53
  • @jkuz That's true. Thanks for all your input-- I tend to forget that there are more than just the two options, so having people point out others is really great. In this particular case its a decision I don't want to rush, but at the same time I can't just take five years to think about it and save the whole time, ending with enough money to buy the new (or mostly new) car outright (which I realize is the ideal :/). – senschen Apr 19 '16 at 13:14
  • @Rob P.: So if you have a new $30K car that suddenly needs $700 worth of work on it, how do you get to work? Even if the work is covered under warranty, you're still out time & trouble. – jamesqf Apr 19 '16 at 17:24
  • 1
    @jamesqf - That's simple. Don't spend 30k on a car if you only have 30k to spend. It's all a trade off, there is always risk and people manage their risk levels differently. If you don't have enough cash on hand to give yourself a buffer, it might make sense to look at an alternative (like leasing). With a lease, generally, you don't pay for repair costs. Of course, I'm also talking about total cost of ownership, not just a on-off repair. A 2k car might be cheaper, but cost more over 3 years than a 5k car. – Rob P. Apr 21 '16 at 01:39
2

What does not seem reasonable about your plan is the payment and buyout. While $200/month payments are possible (but hard to find), buyouts are more typically in the five figure range.

Given that your savings and desired payment for a car is low (the average car payment today is about 450/month), can you really afford the massive depreciation of a late model vehicle?

Why not purchase a 2000 car now, and save the 200-300 per month? In about a year you could move up to a ~5000 car. You can buy a pretty nice car for 5K.

Myself, I am on my third year of driving a 4000 car.

Pete B.
  • 76,481
  • 16
  • 167
  • 236
  • Going on year 12 (or maybe 13?) of driving a $8500 car. And I wouldn't have spent that much if I hadn't wanted to play with a hybrid :-) – jamesqf Apr 19 '16 at 17:26
1

I have a colleague who always leases cars first. He's very well off, has piles of money in savings, owns a home, and the cherry on top, he could just write a check for the car....

He sees the lease as an insurance policy on the first couple of years of the car's life. If it gets in an accident or he finds something about it he doesn't like, he can give it back to the dealer at the end of the term with no hassle and move on to the next car. Some people value the fact that a lease is a rental.

If you're leasing a luxury car or something you couldn't otherwise afford, no amount of mental gymnastics will turn this in to a good idea.

Separately, you should never make a down payment on a lease. If the car is totaled early on, you will not recoupe the money you put down. The issue here is that while the numbers all work out the same between a lease and a purchase your situation is different. If the leased car is totaled, the bank gets its money back from an insurer. If that payment doesn't cover the value of the car, the GAP insurance will cover it. In either situation, if there's an excess remaining it will be returned to you. The issue is the excess may not fully replace your down payment. If you then went to lease another car you would need to come up with that down payment again because you couldn't just simply choose to lease a used car; like you could in the case of a purchase. Additionally, GAP is generally included in a lease whether you want it or not. As far as I'm concerned it doesn't make financial sense to mitigate the value of the GAP coverage once you've decided to live in a lease situation.

quid
  • 48,976
  • 11
  • 99
  • 161
  • You won't recoupe the money you put down, but you will owe less. You should make as large a down payment as you can because the less you borrow, the less interest you pay. Also, a larger downpayment reduces the cost of gap insurance, should you decide to purchase it. – David Schwartz Apr 18 '16 at 17:24
  • We're talking about a lease not a purchase. A large down payment on a purchase is different than a large down payment on a rental. Many lease agreements require GAP insurance. And the GAP insurance will make everyone whole, except you. – quid Apr 18 '16 at 17:36
  • I agree with everything you said in the comment above. Now, is there anything I said in the comment above yours that you disagree with? – David Schwartz Apr 18 '16 at 17:38
  • You should not "make as large a down payment as you can" on a lease. – quid Apr 18 '16 at 17:43
  • Thank you for the different perspective. As it happens, I'm looking at a non-luxury (not sure why everyone assumes I want a luxury brand? I'm looking at a toyota for Pete's sake...) car which I could probably get financing for. I thought that the lease first with a lower payment that won't stretch my budget quite as tight seemed like a better way to go for the time being... Thanks for the reminder that I could use the money saved as a down-payment on a different car if this one doesn't work out. – senschen Apr 18 '16 at 17:48
  • @senschen, These questions are usually posed by someone trying to rationalize leasing a BMW for their first car.... If you've got good credit and you're qualifying for the best rates, I see no problem leasing a prius, personally. Just be sure to ask about GAP insurance and make the person explain to you what will happen if the car is totaled in the first couple of months or at any time during the lease term. – quid Apr 18 '16 at 18:01
  • @quid I explained why that's bad advice. Your payments will be lower the larger the downpayment both because you're borrowing less (when you lease a car, you borrow/finance the difference between your downpayment and the cost of the lease) and because gap insurance will be cheaper. You are focusing on the disadvantages in one improbable possibility and ignoring the advantages in all of the more likely scenarios. – David Schwartz Apr 18 '16 at 18:12
  • You didn't explain why that's bad advice. You explained that the GAP insurance may cost a little more and your lease payment will be more than otherwise. Including a capital cost reduction payment at the front of the lease to save a couple dollars a month while simultaneously risking your ability to recover your capital and mitigate the value of the usually included GAP insurance is not a fair trade for the lessee. It's one thing to reduce the amount financed on a purchase, it's another to reduce the capital cost of a lease. I'd rather spend 2 digit numbers to avoid risking 4 digit numbers. – quid Apr 18 '16 at 18:19
  • @quid You'd rather take a certain small loss than a very small risk of a moderate loss? That doesn't sound particularly sensible. The difference in the price of gap insurance is calibrated to cover this exact different in risk, but the increased finance charges are a certainty that is uncompensated. You're essentially arguing that people should purchase insurance that they don't need even if they have to finance money that they don't need to finance to do it. – David Schwartz Apr 18 '16 at 18:28
  • Priuses lease at 0%. GAP insurance costs a couple of basis points, maybe. This is a rounding error difference in cost for the benefit of keeping your money in interest earning investments/savings while simultaneously shifting the financial risk of the car you're renting to someone else. New cars are a losing proposition no matter how you look at it. With finance rates where they are I don't see a reason to place a large amount of capital in to something that will absolutely lose value to save a couple dollars at less than 1% APR. – quid Apr 18 '16 at 18:55
  • 1
    @quid Claimed lease rates are usually marketing ploys. I haven't seen a 0% lease that didn't have a "or pay cash and save thousands" alternative; the interest is hidden in the increased cost. – Yakk Apr 18 '16 at 21:03
  • @Yakk I'm not saying leasing is the lowest cost way to have a car. I'm not even saying leasing is a good idea for everybody. I'm saying once you've decided to lease a car one of the pitfalls to watch out for is a large down payment. If squeezing every penny of black and white, dollars and cents value out of your transportation is meaningful to you, you should not be leasing. If you view your car as a monthly cost for transportation then you'll be paying a little more here and there to offload the risk and resale effort; as such piling capital in to a lease doesn't make sense to me. – quid Apr 18 '16 at 21:44
  • @quid Except you take a small risk and are precisely paid back the value of that risk in the form of lower insurance. And you borrow less money. It's kind of strange to argue that if you're leasing, you don't care about efficiency, so you might as well waste some more money by borrowing money you don't need to borrow. The reason, I think, that it doesn't make sense to you is that you are disproportionately focused on one specific risk to the point that you are not able or willing to objectively compare it to the upsides, like a person who won't take a plane because of terrorism. – David Schwartz Apr 19 '16 at 08:42
  • @DavidSchwartz, go sign a one pay lease, I hope it works out for you. – quid Apr 19 '16 at 16:51