If leasing a car is such a bad financial deal, why do so many people do it?
This answer bothers me. Not because it is fraught with inaccuracies. But because he's making the case that leasing may be a better choice when your goal is to own the car for 3-5 years (for example). Or you could plan not to own the car exclusively through the steepest part of the depreciation curve (and pay interest on that!!!).A lot of people do it because it is financially a great deal. Most people who say leasing is a bad financial deal have no idea what they are talking about from a financial point of view and are usually reflecting some other personal biases. The only caveat I will give to my above statement is if you plan to own your car for 7–10 years or more, then buying could be a better deal.
Here’s why leasing is technically a better financial deal: When you lease a car, the lease payment you make consists of two parts - 1) depreciation expense and 2) interest expense (plus taxes)
The depreciation expense is basically compensating the dealer for the loss in value of the car as you use it. You “pay” for this even when you buy the car as cars lose value over time. So this isn’t anything new. The reason why it’s better / lower when you lease is that the dealer as a business can get tax benefit from the depreciation whereas you as an individual cannot. As a result, the dealer can afford to charge you a lower depreciation expense (thus sharing some of the tax benefit) than what you would “pay” on your own. How much of this tax benefit you extract is a part of the negotiation you have with the dealer.
The second expense is interest expense which is also common between both modes of purchases. Dealers hide this in what they call the “money factor” component of lease calculation. Thanks figure out what’s the implied interest rate, just multiply the money factor number with 2400. That way you will know whether they are giving you a good financing deal or not and if not you can push to get a better deal.
Follow the following steps to get a good leasing deal:
1.Always insist on paying the lowest down payment they can accept. If they ask you how you want to pay, your answer should be $0. You can of course not pay $0, but hat will set the tone.
2.Negotiate on the Capitalized expense value, which is effectively the price you are paying for the car. Different nice between the Capitalized expense and Residual value is the depreciation you will pay over 3 years. The lower this number, the lower is your monthly depreciation expense component. Dealers mostly can’t change Residual value numbers as that’s set by corporate. So you can only lower this by negotiating a lower purchase price.
3.Fight for a good financing rate by converting money factor to implied interest rate. Compare it with what they are offering on purchasing the car outright.
As a result of the above, you will notice leasing payments are always lower than purchase payments. It’s not a trick, it’s just math. The argument that own the car of some value at the end of three years doesn’t hold water as you would have paid meaningfully more in the payments, technically giving you a negative equity, which you can only recoup by selling the car. That’s an other source of value to you, transferring the risk of realizing the Residual value 3 years our to the dealer. If you buy the car, that risk is on you, if you lease it’s on your dealer.
I have presented some points on a very high level here, you can do online research on any of the above components to get a more detailed understanding. The bottom line is that leasing is always better as long as you are going to own the car for less than 7 years and you follow the above 3 points for negotiation I laid out. Good luck!
It's like....what's more comfortable? A closed fist punch or an open handed slap to the face?
Leasing has its place but I really have a problem when people try to paint it as some kind of financially good decision - if you are looking at leasing, finances are probably NOT your priority. Why? Because people who lease are 1) committing to literally hand over cash for the steepest part of the depreciation curve on a car, 2) Often times have no down payment available which, to me, is a sign of poor financial management (and if you just endured a hardship, leasing is not the first thing you should be considering) and 3) Probably trying to drive more car than they can really afford.
None of those strike me as good financial decisions and I see no point in trying to twist some logic to suggest that they are.