Americans are leasing a record number of new cars and trucks — more than 1 in 4 of the new vehicles rolling off dealer lots.
Leasing is popular because it offers lower monthly payments than traditional auto loans. If you can't afford the payments on a loan, Anthony Giorgianni, Associate Finance Editor at Consumer Reports Money Adviser, says it's a good sign you can't afford that car or truck. "Leasing puts you in a cycle to get a new car every few years when the depreciation is greatest," Giorgianni says, "and you just have [monthly payments] indefinitely.”
Look at a deal we saw on the 2015 BMW 328d sedan — a luxury car anyone would love; sticker price: $42,450. Let's say you tried to buy that vehicle with a traditional 48-month loan at 3% interest and 10% down payment of $4,245. Your payments would be a checkbook-draining $845 a month — out of the question, right?
Or you could take advantage of the 39-month lease BMW was offering, where the monthly payment was $369 with $4,164 cash due at signing — a $3,000 down payment, $795 acquisition fee and your first monthly payment of $369. So, for the same up-front cash, you could lease that BMW with realistic monthly payments. What's not to like?
Let's move forward 39 months when the lease is up and it's time to turn the car in... You would have spent just over $18,000 with nothing to show for it except an empty garage. That money is gone, and we're assuming that you haven't driven more than an average of 833 miles/month or 10k miles/year.
Return the car with more than 32,500 miles on the odometer, and you'll pay 20 cents for every additional mile. Say you changed jobs during your lease, and your commute got longer. Or you wanted to take a couple of big road trips? An extra 5,000 miles means you'll need to pay another $1,000 to get rid of the car. We also hope you've been very careful. You could face hundreds or even thousands in additional fees for excess wear-and-tear.
Realistically, you probably spent $20,000 in just over three years, and have nothing to show for it. Now you're probably going to lease again and start another round of monthly payments.
What if you had bought a nice midsize sedan, a Ford Fusion or Honda Accord, that costs a little more than half as much as that Beemer? With the same cash investment and monthly payments, that car could be paid-off, and you'd have it to drive for as long as you want with no more monthly payments.
Spending more than necessary on cars is one of the biggest wealth killers for Americans, and leasing enables many consumers to make that mistake. The bottom line is that while leasing may give the illusion of wealth, it won't help you build true wealth. Living within your means is the foundation real financial security is built on.
* Original Article by Craig Guillot, May 30th 2015
