Hey everyone, it’s Finance Fridays. As you may know, I’m a big proponent of buying a car used. However, today, I’m going to look at an alternative I will likely never do, but can try to explain the reasoning for… “The Case for Leasing a Car“.
The Case for Leasing a Car
Like I said before, this is something I will likely never do, but I want to explain that it may make sense in a very narrow population:
You don’t like the responsibility of “owning stuff”
When you own something, you must accept responsibility for it. If it’s your car and it breaks down, the onus is on you to get it to the mechanic and get it fixed. Then while it’s at the mechanic, it’s your responsibility to find your own way around whether that means renting a car or getting a ride from someone else.
You can contrast this against leasing a car where if something breaks you bring it to the dealer, tell them to fix it, and they loan you another (usually similar) car.
You like new stuff
For some people, even if they buy a car and pay it off over 5 years, they will end up trading that car in and buying a new one anyways. This is a really bad idea. The first five years of depreciation for all cars is probably the worst. This is compounded by the fact that these people likely trade it in at the dealer to buy a new car. In this way, you’re basically getting hit with depreciation over and over again and still don’t own anything.
In this particular case, if you’re going to have a new car every 3-5 years anyways then leasing is probably the better option.
You have your own business
Leasing a car under a business allows for much better tax writeoffs than owning a car:
For a business owner who owns a car, the write-off is limited to 53.5 cents for every mile you drive the car for business. So 10,000 miles would equate to $5350 and the interest on the loan.
If you leased the same car and used it 100% for business you could write off 100% of the lease payment with no limits.
From the above, we can deduce that leasing a car really only makes sense in two categories:
- Don’t want responsibility and/or like new stuff
- Own a business
Like many things, you have to utilize your Value Cost Ratio here for #1. What you’re really paying for is peace of mind and convenience. For some people who already have a lot of other responsibilities, owning and maintaining a car is just not worth it to them.
I understand this.
It has to do with taking responsibility for the things that matter to you, and not the things that don’t matter to you. Perhaps your time is better spent doing other things rather than worrying about car maintenance and you like the “schedule” that leasing a car provides. Additionally, for any new technology that comes out you will be among the first to have it since you have a new car every 3 years.
Wait… so you’ve never leased a car?
No, I actually have before.
For part of my residency I leased a car for 3 years and it was a hassle-free experience. It’s very convenient to drop off your car when it needs maintenance and get a loaner car. It’s kind of fun to drive some random loaner car for a little while too. During residency, not having to worry about a car was pretty nice. However, after 3 years of payments you realize that you have to turn the car back in and don’t get anything for it. For some, the easiest decision at that point is just to lease another car.
However, I opted to buy a Rav4, the last year they made the V6 (2012). Our two V6 Rav4s have served us well, and I just paid off the 2012 one earlier this year. This is kind of weird, but I actually bought the 2012 Rav4 in 2013, one of the last on the lot (got a good price!). This explains the 5 year payment plan ending this year, 2018. I also did $0 down because Toyota was running a 0% APR deal at the time, so all in all I think I did pretty well on it. Those two Rav4s will be driven into ground, and who knows they may even outlast me.
All that said, I will probably never buy another new car — or lease a car. The amount of money lost in depreciation is just too much for me. I’d prefer to buy a reliable car that is between 3-5 years old — not so old that it may fall apart, but not so new that it still can depreciate significantly — just right (my “Goldilocks” rule). However, I’m hoping my cars can all last another 10 years each. So I am hoping not to buy anything for awhile. Maybe by then all cars will be electric (and autonomous) and I can get a used one cheap. 🙂
I’m going to echo most of the articles you can read on leasing versus buying. In general, it makes sense to buy a car and in general, buying a used car is the most efficient usage of your money.
However, in a select group, leasing may be the better option depending on how they value their time and their own internal Value Cost Ratio.
Shout out to my rich friend AY for giving me the idea for this post — he’s leasing a very nice car. 😉
Don’t want responsibility and like new stuff? — leasing may be an option for you.
Have your own business? — leasing may be an option for you too.
However, I’ve done it before and I probably won’t do it again.
Use your Value Cost Ratio.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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