When you opt for Leasing A Car, you might feel like you’re getting a great deal on a shiny new vehicle. The allure of lower monthly payments and driving the latest models is undeniably strong. However, are you truly saving money, or are you simply paying for the steepest part of a car’s depreciation and then handing it back? Let’s dive deep into the realities of leasing a car and explore why it might not be the financially savvy choice it appears to be.
It’s interesting to observe that around the tenth year of a car’s life, its value starts to level out. This is a key reason why purchasing a car that’s a few years old and has the potential to last another decade is often considered a smart move. It’s a way to sidestep the significant financial hit you take when buying brand new or, indeed, when leasing.
The Allure of the New Car Smell (and Low Lease Rates)
Let’s be honest, it’s easy to understand the appeal of leasing. It’s not always simple to choose a practical, older used car, especially when you’re working hard and earning a good income. There’s a common feeling, particularly for those who spend a lot of time in their cars or work demanding jobs, that you deserve something nice. This feeling, combined with the enticing scent of a new car and the promise of a seemingly low lease rate, can be incredibly persuasive. It’s easy to get caught up in the idea that you’re snagging an amazing deal.
I almost fell into this trap myself when I was returning my leased Acura RDX. The dealership had me sit in a brand-new model, “just to check out the features.” For a fleeting moment, I was almost convinced to lease again. But then, my financial goals snapped me back to reality.
Here’s the crucial point to remember: we often justify spending more on a car, or leasing a more luxurious one than we can realistically afford, by telling ourselves we work hard or have a long commute. However, by leasing or buying a depreciating asset that stretches your budget, you’re actually locking yourself into working longer. You’re committing to more commutes, simply because you now must cover the costs of that expensive, rapidly depreciating car.
Perhaps the most frustrating aspect of leasing is that at the end of the term, you don’t even own the vehicle. You’ve essentially paid for the period when the car loses value most rapidly, only to return it. While car ownership can be a slightly better financial decision if you manage to pay it off and drive it payment-free for many years, leasing is the polar opposite. You’re renting the car during its most expensive phase and then walking away empty-handed.
(You might be pondering the comparison between renting a home and leasing a car. The key difference lies in the additional costs associated with homeownership, such as property taxes, insurance, and ongoing maintenance, which complicate the rent vs. buy decision for housing. Cars, on the other hand, don’t present the same level of extra costs for owners compared to lessees. Leasing a car isn’t typically cheaper than buying in the long run due to the absence of these offsetting ownership costs.)
I’ve previously broken down the real costs of car ownership in another article, Why You Need to Sell Your Car – Maybe. To summarize, choosing a less expensive car, buying it outright, and driving it for a decade while investing the money you would have spent on car payments, can potentially net you an extra $750,000 by age 55. That’s the power of just ten years of avoiding the allure of a fancy car lease.
Leasing Hampers Your Journey to Financial Freedom
Remember the principle of financial independence: you can consider leaving traditional employment once your investments reach 25 times your annual expenses. If you’re making car payments, let’s say $500 per month plus $150 for insurance, you’re spending $7,800 annually on your car. To sustain this lifestyle of leasing a $500/month car indefinitely into retirement, you would need an additional $195,000 invested ($7,800 multiplied by 25).
So, leasing not only slows down your progress towards financial freedom due to the opportunity cost of those payments, but it actually increases the amount you need to save to reach your financial goals.
This makes the “I work hard, I deserve it” justification for leasing a fancy car seem rather illogical. It essentially guarantees you’ll have to keep working hard for longer.
It’s reminiscent of that meme: “I drive my expensive car to the job I need to afford the expensive car, so my newly bought house can sit empty while I’m at work making payments on it.” It’s a cycle that seems completely backward when you really think about it.
A Better Approach to Car Ownership (or Lack Thereof)
“Better” is subjective, but in this context, “better” equates to being less financially wasteful. Here’s a breakdown of car ownership options from best to worst from a financial perspective:
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The Best Option: Structure your life to minimize or eliminate the need for a car altogether, or manage with a single family car. While this isn’t feasible for everyone due to urban planning and lifestyle, if you can live within walking or biking distance of work and essential amenities, it’s highly advantageous, especially with the rise of remote work. Even reducing your household to one car from two can significantly improve your finances without major lifestyle changes. Consider that most cars remain unused for about 90% of their lifespan.
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The Better Option: Purchase a used car, ideally a Toyota or Honda known for their longevity (easily exceeding 200,000 miles) and low maintenance costs, outright without a loan. If you must finance, aim for a very low-interest loan.
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The Meh Option: Buying a used car of another brand and taking out a substantial loan. (Confession: This is what I did with an Audi, purchasing a three-year-old German car at a lower price but still taking a $16,000 loan).
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The Worse Option: Buying any new car. New cars, across the board, represent poor value due to immediate and steep depreciation.
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The Worst Option: Leasing a new car of any type. As discussed, leasing means paying for depreciation during the most rapid value decline and gaining no equity.
Having personally transitioned from “the worst” to “the meh” and now aiming for “the best,” I can attest to the immense relief of not being tied to vehicle payments. Cars can be a source of stress. Tires get punctured, oil changes are necessary, insurance renewals loom, check engine lights illuminate… the list goes on. It’s a constant headache, and the prospect of being car-free for a while is incredibly appealing.
Even owning an inexpensive car lessens these financial burdens. I once received a $4,000 repair estimate for a dent in my Audi – requiring a new door shipped from Germany and a full side repaint. I suspect a similar dent on a Honda might have been a quick, inexpensive fix at a local dealership.
My move to a car-free lifestyle was partly intentional. We chose a location where our regular destinations are within biking distance. With remote work becoming increasingly common, if your job isn’t location-dependent, exploring remote opportunities could free you from car dependency.
Final Thoughts on Car Leasing
Sometimes, a car is essential for our lifestyle, and that’s perfectly acceptable. However, the type of car you choose and how you acquire it have a profound long-term financial impact. Making smarter car choices can shave years off your journey to retirement and buy back your financial freedom.
It’s not about constant deprivation but about making slightly better decisions that yield significant compounded rewards over time. More importantly, it’s about recognizing that the car you drive has surprisingly little influence on your overall happiness, even if you spend considerable time in it.
As long as your vehicle gets you where you need to go safely and comfortably, paying significantly more to lease a fancier model likely won’t add proportional value to your life or your long-term financial well-being.
