Mellody Hobson talks about the pros and cons of leasing a vehicle on today’s “Money Mondays” segment.
Fasten your seatbelt. Car sales have surged back to pre-recession levels, and in August, all of the nation’s top automakers—including Ford, GM and Chrystler—reported sales thresholds they haven’t met since late 2007, with all posting double-digit gains.
Experts attribute the boost to a number of factors, including an improving employment situation, a booming stock market and a strengthening economy. Many people may have postponed the purchase of a new car the past few years, and the opportunity to update those worn-out wheels has become more attainable.
So those hard-to-refuse lease deals are attracting more buyers?
It’s one of the driving forces, for sure, and it marks an overall shift in consumer mentality: Gone are the days of striving for the pride of ownership. The house and car that are fully bought and paid for? That was grandpa’s game. Today it’s about access—instead of buying DVDs and vinyl people use Netflix and Spotify—in effect renting access to countless titles instead of outright purchasing far fewer. The same goes for cars. Ownership isn’t a priority, and a brand new car can be yours for as low as just two or three hundred dollars a month.
But if you do the math on buying a new car versus leasing it, the lessee always comes up short over the long term. Why? Because although the buyer pays more out of pocket initially, once it’s paid off, he’s left with a car. Sure, it’s a car that has depreciated in value, but it’s worth something, and the lessee who has made payment after payment is left with nothing. Once you account for that value a car owner retains, leasing can cost 30% more. And I know it’s not the shiniest alternative, but as always, the thriftiest option is buying a used car.
But don’t car owners have more carrying costs they have to cover?
That’s absolutely true. Leasing means sidestepping repair and maintenance expenses (excluding oil changes and tire rotation). This is a particular concern when considering a used car, but new car buyers aren’t immune—owning comes at a price. But industry experts point out that car insurance is generally higher for a leased vehicle because it frequently includes gap insurance—which pays off what is still owed on the lease in the event the car is totaled. Whether it’s maintenance for the new or used car or insurance for the leased one, it basically ends up a wash.
That doesn’t mean that buying a car is the right choice for everyone. It comes down to priorities. If you’re trying to balance retirement goals, college savings and basic living expenses, leasing may be the best choice for you—especially if you don’t already own a car you can trade in and saving up the down payment is too difficult.