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To Lease Or Not to Lease?

To Lease Or Not to Lease?

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The best time of year to buy a car is . . . well, in the next few weeks. At the end of the year, before the new year’s models are all they have left, and near the end of the month, when they are trying to make sales quotas. And with the economy in the toilet and the auto industry struggling just to survive, the time to get deals is now. If you’re in the market for a car, you might just be in luck. Especially if you live in Florida, where I hear talk that they are doing 2 for 1 specials. On cars. Yes.

So the question is: what is the best way to handle a car purchase? The short answer, as always, is that cash is king. Wherever possible, you should buy your car with cash, just like you would with any other purchase. I don’t mean by this that you should bring in a big suitcase full of cash to the car dealership, no. But if you can get your hands on a cashier’s check, that would be ideal. First of all, you might be able to negotiate a better deal with cash than you can with financing. Having a finite amount of cash makes it much easier to say, “That’s my final offer, and no, I don’t want Lojack. Or the extended warranty. Or the special paint coating.” Because when you’re financing, they love to throw shit in at the last second, when you’ve already been beaten down by the haggling and the credit checks.

In a perfect world, we’d all pay cash for our cars. And ride the bus or drive beaters until we could afford to do so. This is what Dave Ramsey advises–save up your cash and don’t buy until you can do it without financing. This is also the policy I would espouse, but since I live in a city where it is virtually impossible to exist without not only a car, but a car that is fairly reliable, I know that this is not going to work for everybody. In the real world, like it or not, people finance cars. So how can we figure out how to approach a financing situation with the least amount of trauma to our pocketbooks?

Sometimes a lease can look attractive because of its promise of no or little money down and slightly smaller monthly payments. But please beware: these enticements are nothing more than deceptive smoke and mirrors designed to take all of your money. I am here to stop the insanity today. NO MORE LEASING. A lease will always, always cost you more money. When you look at the actual math, you will realize that a lease is ALWAYS the equivalent of somebody bending you over a chair.

Don’t believe me? Let’s look at an example. Now, since this is my fantasy example, we’re buying a Lexus 400h AWD with all the fixin’s. Here is the info straight from Lexus’ website.

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The purchase scenario requires about $7,000 down, provided the first month’s payment is not due. The lease requires $9,000 down. If you are leasing, you probably would not put this much down, but in order to make a fair comparison on actual cost to you, I have to do it this way. The cost would be even more without this addition.

So after the two years, we can bet that the value for the car will have dropped at least 30%. Let’s just guess that you now have a car that is worth about $36,000 (though it probably is worth even less than that). If you’ve leased the car for two years, you have been paying in $950 a month for 24 months, which equals $22,800 you’ve paid into the car, plus the $9000 when you signed. You don’t have any equity in the car, because it was just a lease. So overall, the car has cost you $31,800 to drive for two years.

If you bought the car, then you have been paying $2,028 per month for 24 months, plus the $7,000 you put down. Overall, you have put in $55,672. Yes, for a car that is now only worth $36,000! (This is why buying new cars is a bad plan, but I’ll get to that). But, the good news is that in this scenario, you now own the car outright, so you can turn around and sell it for $36,000, and so you are able to recoup a chunk of your money–the car will end up having cost you $19,672 to drive for two years. See that? Almost HALF of what a lease effectively costs you for the same car!

Now, a bunch of you are going to complain because to a certain extent, this is comparing apples and oranges. People don’t usually finance a car for only 24 months, and they don’t usually lease with $9,000 down. But I encourage you to play with these numbers in as many different scenarios as possible–prove me wrong! I dare you. It’s crazy to lease! Stop thinking in terms of what the payment will be and start thinking in terms of what the best move for your financial future will be!

Which brings me to my last point–did you see that drop in value for the new car after two years? It’s INSANE. This is why you should buy used cars. Buy used luxury cars that are precertified if you want, but do not buy new cars, let the people leasing or financing through the roof take the hit on those! You’re smarter than that. A new car smells nice for like a day. And then it’s just that damn old car again.

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