Not many people consider renting a car for years on end. Leasing a vehicle is the same thing, except we are obligated until the end of the lease. Financial experts like Dave Ramsey call them a fleece and not without good reason.
Leasing offers one supposed advantage over buying
A lease allows the renter to drive a more expensive vehicle than they might afford to make the purchase payments on. This privilege comes at hefty price. With a lease, the renter gives away the equity in the vehicle, for a lower monthly payment. Making payments without earning equity is not a path to financial security.
Why automobile dealerships push vehicle leases
Automobile dealerships often push buyers toward a vehicle lease. A vehicle lease allows them to sell more expensive vehicles. Often the buyer would not be able to afford the purchase otherwise. This is the first tip-off. Rather than consider a more affordable vehicle, many folks turn to a vehicle lease. For the dealership vehicle leasing is a no-loose situation. A leasing company pays the dealership in full. They also often receive a big commission for pushing the vehicle lease. The renter is now responsible for everything, just as if they had purchased.
The person that leases a vehicle is responsible for it
Though they never actually own the vehicle, with a lease the renter is responsible. If they damage or wreck the vehicle, it will have to be paid for. Leasing companies normally require renters to carry high levels of insurance, to cover such a loss.
Owing more than the value of the vehicle
Another issue is the amount owed, compared with the value of the vehicle. For instance, if we lease a $40,000 vehicle and suffer a total loss accident. An insurance company will pay the current market value of the vehicle. This may be several thousand dollars short of the amount still owed on the vehicle lease. The renter is responsible for the shortage and must pay the vehicle lease in full. This responsibility does not end, even though the vehicle is gone.
They often include expensive gap-insurance to cover this issue. Gap insurance adds even more expense to the renter with a vehicle lease. Gap insurance is in place to cover the symptoms of an unwise decision, leasing a vehicle.
The leasing company will win
Vehicle leasing companies make big money. The renter is obligated to pay the full lease, no matter the situation. This includes depreciation on the vehicle, any repair and maintenance, and a nice profit. Mileage allowed per year is normally limited to keep depreciation low. If we exceed the mileage limits, we incur a significant cost. At the end of the lease the leasing company owns the vehicle, which they can now sell, for additional profit.
Purchasing the vehicle, at the end of the lease, usually cost a lot more than buying it outright. Adding the lease payments, other charges, the amount being asked will often exceed the price of a new vehicle. If we must finance the purchase of the leased vehicle, the cost is even higher.
Getting out of a lease is even more problematic. For example, if situations change, we can sell a purchased vehicle. This is not so with most leases. If the vehicle proves impractical, or if it does not meet your needs, we must still pay the lease. The only way out of most leases is payment in full.
An old and wise statement goes, "If something looks too good to be true, bet it is."
The author may have been describing the vehicle lease. Buying a vehicle, with monthly payments, greater than what we can afford, is a red flag. Trying to lower payments by giving up equity, as with a vehicle lease, may mean substantial financial problems.
Smart people still get caught up with a shinny new vehicle. Billions are spent on clever advertising and they highly train car dealership personnel, just to make this happen. Joe is a smart guy, but here’s how he made the worse financial decision of his life.
Joe owned a seven-year-old Toyota Camry, dependable but in need of maintenance. The vehicle needed a timing belt and a set of tires, several hundred dollars. The car had been great, but maybe it was time to look for something a little newer.
Joe pulled into the dealership and walked over to the used vehicle section. A two-year-old Escalade caught his eye, wow! This baby was loaded, GPS, sun roof, leather interior and alloy wheels. "The Escalade is quite a vehicle," said the salesperson. How much, was Joe’s first question? "What sort of monthly payments are you looking for," was the reply?
Not more than $450.00 a month, this was about $100.00 more than Joe had paid on the Camry, but he can probably swing it. "Is this your trade-in" he asked, pointing at the Camry? Yes Joe answered. Let’s go to my office and see if anything can be done.
I do not think we can get your payments that low, came the reply, and Joe’s heart sunk. The inevitable "But" followed, with a new suggestion. Suppose I can put you in a brand-new Escalade for that payment? Joe was about to be reeled in. How is that possible?
The salesperson answered, "With new vehicles there are several "creative" ways"
A quick test-spin in the new Escalade and Joe was primed. It drove great and smelled even better.
Joe sat in the sales office for what seemed an eternity. Every so often other salespeople would come in and say, "You’re getting the new Escalade, great vehicle!" Like actors on a cue, this was simply part of the show. Finally the salesperson came back, with a long contract and a set of keys. He proudly stated, "You got your new Escalade, for only $500.00 a month," throwing Joe the keys.
"Just sign this lease and you are all set." Had the sales person forgot, Joe said not more than $450.00? "But I said not more than $450.00 a month," argued Joe. "You’re not going to lose this beautiful, NEW, vehicle for just $50.00 a month, are you?" His question did make Joe seem petty. The sales manager stepped in, "You’re making a great deal Joe." All logic was gone, and Joe was committed to $500.00 a month, for three years, and his old car. The dealership hit the ball out of the park.
Soon Joe realized the $500.00 a month was only part of his problems. Joe had carried liability insurance on his Camry. Now the full coverage insurance and gap-insurance added several hundred more to his monthly expenses. This Escalade also burned premium fuel, something he had not expected.
The new Escalade was consuming much Joe’s income. Eventually the three years passed. Joe was ready to be done with this burden, but had a few more surprises. He had put about 38,000 miles on the Escalade. This was 2,000 over the limit and added another $500.00. Repair of a ding in the bumper cost an additional $500.00 for his deductible.
Together, Joe had paid $18,000 in lease payments, another $1000.00 in charges plus his trade in, worth about $8000.00. That was $27,000.00 for three years, with nothing to show for the experience, except some wisdom.