*collective audible gasp*
I seem to be on a roll with writing about controversial topics in the personal finance world. A few weeks ago on the podcast (shameless plug) Pete and Damian breached the topic of leasing vs buying a vehicle. I’ve decided to kick this door wide open and tell you why I think leasing a car isn’t the worst financial decision you could make, contrary to what many in the realm of personal finance would have you believe. There are several situations where I believe a lease makes more sense than purchasing. In fact, in my personal life I once leased and it worked out great.
When I graduated college (year, non-disclosed) I moved away from my support system. Throughout my high school and college years I drove the same car. Unfortunately, this car cost me (and admittedly, my parents) a lot of money over my seven years of ownership. It seemed to need a fairly major repair too often that as a broke-as-a-joke college student crushed my savings each and every time. I went to school relatively close to home and when I accepted a job offer several hours away I knew I couldn’t rely on a family member to give me a ride or loan me a car while mine was in the shop. I needed something more reliable but I had very little saved as a result of the previous repairs and college tuition. When I started to look at financing options a lease quickly became attractive to me.
- All things considered, a lease is pretty cheap. For me, the driving factor in leasing was knowing I could drive a reliable car for a very low monthly payment. But, best of all due to the warranty even if the car had mechanical trouble it wasn’t my financial responsibility. This low monthly payment allowed me to save a sizable amount of cash to purchase my next car, which is my hope for you. A lease, in my opinion, serves as a financial bandage.
- If you’re considering a lease, first determine how long you plan to lease the car. A lease can be months or years long depending on the dealership, make, and model of the car. I know persons who lease for six months at a time but in my experience a three year lease is the most common. What this means is that for 36 months you make your agreed upon monthly payment. You also agree that at the end of the agreement you won’t exceed the mileage allowance as previously discussed.
- Your mileage allowance is one of the next most important considerations in leasing. A standard lease allows you, the leasee, to drive around 10,000-12,000 miles per year. Before signing you have the opportunity to increase your annual mileage limit. Knowing how many miles you can expect to drive is paramount as each mile over your annual limit will cost you between 15 and 25 cents/mile (or more). Increasing your mileage limit at the beginning of the lease will cost you pennies/mile vs. quarters at the end of the agreement. This penalty may seem trivial but a $.25/mile means you’re going to shell out $250 for every 1,000 miles over. No one wants to write a check upon the return of a product and this might not be your only end of agreement charge depending on the condition of the vehicle.
- Think about likely physical damages in your situation. When you return your lease it will be inspected to ensure there are no damages beyond normal “wear and tear.” Your dogs nail ripped the seat? You’ll likely pay for that. Your child’s red juice box spilt on and stained the floor? Another charge. A shopping cart blew into your car leaving a large dent? You guessed it. If any of these sound like something you’re likely to encounter it might not make financial sense to lease. Wear and tear means different things in different agreements. Make sure you read your agreement carefully and understand the possible charges for dents, rips, and stains.
A lease isn’t for everyone. In fact, I never intend to lease again despite my stellar experience. A lease might be a valid choice if you’ve been severely burned by repair costs depleting savings, keep low annual miles, and (most importantly) have a plan for the 37th month after you sign your lease. But heed my warning, you need a plan for the 37th month.
Don’t absorb the difference between a traditional payment and your lease payment into your monthly expenses. Use the time to aggressively save and achieve financial freedom from your vehicle.