I've read up a little bit on this topic and would like to share some of what
I've learned from my financial background, and how it applies to the "lease or buy" a car
scenario. I’ll try to make this clear
and if I am incorrect about any of this, please let me know because I am always
learning!
In this example well assume you have good credit, which will make each
scenario more clear.
**Remember this is hypothetical and does not claim to be exact #’s!
1.
Lease:
You get a brand new 2008 Honda for $300/month, no down payment, 15k
miles per year. In 2011 you will get a
brand new Honda for $325/month (inflation). You will always have the warranty
for both cars.
2.
Buy:
You get a brand new $25k Honda for $450/month (with a low rate) for 5
years. You get a 5 year warranty and will eventually own equity in the car.
In a perfect world, well assume that you choose to put the extra $150 a
month you “saved” by leasing instead of buying into an investment where you
could potentially gain high interest.
Here is how the two scenarios could play out.
It is now 2013:
1.
Buy:
You now completely own your 2008 Honda.
You own all the equity in the car, which is now worth between
$10k-$12k. You would have to sell the car
to get that money, and the longer you hold it, the more it depreciates. You have spent $27k already into the car and
now that the 5 year warranty is up, you will be responsible for any
repairs/damages from now on. You could
potentially save a lot by keeping your car for 5-10 more years but would then
sacrifice a lot more equity and take on more repair risk (and even the risk of
having to buy a whole new car soon).
2.
Lease: You
now have a 2011 Honda and will have a 2014 in one more year (after 6 years
total). You drove a 2008 for 3 years and
the 2011 the last 2. You have spent a
total of $18,600 the past 5 years + plus the risk of going over the miles or
repair fee’s if you mess up the car. But you have also now have $8400 in cash +
interest ($150 month first 3 years and $125 thereafter) which could be
significantly more if you invested correctly over the past 5 years. You still have a complete warranty on your
car and will have the new options of a 2011 Honda and soon a 2014 Honda. While you have spent a lot to “rent” your car,
your cash equity could be significantly high if you invested on schedule and
correctly.
So, In conclusion the best option in my opinion is IT DEPENDS. But it really depends on if you want your
equity to be in your car (to save by keeping longer) or in potentially cash
after 5 years (but the cost of paying always thereafter). The equity gained by buying might not be as
important to you as the power of always having a new car. You will have to continue to pay close to $5k
per year or more by continuing to lease after 2013, which will change this
scenario a lot over the next 5 years (if say you kept your bought 2008 honda until 2018). Plus, if you choose to spend the extra $150
per month instead of save it, well then you have zero equity but had more to
spend over the years.
Again, I will not claim to be a car expert and this hypothetical situation on
the financial aspect of buying or leasing a car.
Here's a much simpler way to determine whether to lease or buy:
If it's a Honda, Toyota, or Nissan, buy it. The car will last 10+ years. You'll only have to make car payments for less than half that time. Well-built, great gas mileage, plus it will hold its value as the dollar continues its descent. Win, win, win.
American car, lease it. You're not going to want hold an American car for more than 2-3 years. It's not well-built and the paint job will soon fade. Car lease payments every month for the rest of your life.
This is based on my experience:
1976 Toyota Corolla: Parked it for 2.5 years while I was overseas. Came back and it took 10 minutes to start it. Filled it with gas and drove it 200 miles. Ugly as sin, but rugged as heck.
1984 Olds Cutlass Supreme: Beautiful car, lousy transmission.
1989 Mercury Grand Marqis: Lousy transmission. Steering wheel oozed a black goo when parked in the sun. Numerous problems.
1994 Nissan Sentra: 295,000 miles. Transmission finally gave out. Paint job faded after a few years.
1997 Honda Accord: 515,000 miles. Yes, 515,000 miles. I bought it with 30,000 miles on it, same engine, same transmission. Interior held-up great. Paint job beaded water all but the last couple of years. (Damn, I miss that car. I sold it for $350.)
2008 Honda Civic: Proud owner....
So, as you can see, my experience speaks for itself.
Now, I'm sure someone has experiences just opposite from me, but I will never, ever own an American-built car. Detroit has cost me a lot of money, but my boycott of any American cars will cost them even more.
Dobe,
Any German/Italian cars in that mix that you may have left out? 
teke, maybe it's stupid crap like this that is behind why you have not closed a sale yet. I could have made 5 calls in the time it took me to READ it, God only knows how many calls you could have made in the time it took to write it.
Well Primo I can already tell that you don't like me thats why you have been bashing me and my VA recommendation. Please don't post in anything I ask if it is just going to be negative and pretty much useless. I did research on leasing for my own car and just thought I'd share in the lounge area. I'm sorry that the lounge area is part of your personal space and I invaded it.
Teke - He didn't "bash" your VA recommendation. You asked, he (and others, including myself) responded. If you don't want a real response, don't ask us for our opinion, ask your mother, I'm sure she'll positively reinforce your investment recommendations.
I realize this is the "Lounge" section, but did you really expect zero ball busting when you post an 18 page novel about a decision to buy or lease a freakin' Honda? I'm not trying to "bash" you, but you need much thicker skin.
I know Ferris has missed me so I'll give my 2 cents here ...w/inflation... nickel's worth.
Where's that cool CFP jodabrkr these days?
My FA, Suzie Orman, says never never lease. You'll never come out ahead this way.
Always plan to drive the car at least 10 years, if possible--the millionare next door, does, anyway.
Re: Warranty: Don't know: Normally, your vehicle will hold up till the warranty expires anyway and doesn't cover your usual wear items. I'd say it's safer to just go with the factory warranty since more than likely anything else is a rip off.
Maintenance? Indy or Dealer? To get the warranty coverage, you have to use a dealer for repairs and they know the make better so it's probably ok to use the dealer for repairs and servicing unless you feel they are really overcharging and ripping you off. 
Well Primo I can already tell that you don't like me thats why you have been bashing me and my VA recommendation. Please don't post in anything I ask if it is just going to be negative and pretty much useless. I did research on leasing for my own car and just thought I'd share in the lounge area. I'm sorry that the lounge area is part of your personal space and I invaded it.
teke - a couple of other things you overlooked in making this decision (business benefit of leasing vs. buying and the cost of additional miles driven over 15,000 have been pointed out already).
Insurance - if you lease, your auto insurance costs will always be high, because you will be required by the lease company to insure it at a certain high level and you will always be driving a relatively new car. You need to compare insurance rates in years 4 and 5 and subtract the higher insurance costs of leasing from your "savings."
Annual Licensing/Registration Costs - in many states, these costs are linked to the current value of the vehicle. The leased vehicle costs will increase as you are driving a now more expensive car than the previous 3 years.
Cash Option - Let's say I had $27k sitting in my account. You say I should take $300 monthly for my lease. In 3 years, I take $325 monthly. At the end of 5 years, I have $18,600 left in savings. I still have to make a lease payment, so I pay $325 monthly for year 6, then get a new car, my lease payment increases to $352 (same % increase as the previous lease). When that lease is up at the end of year 9, I have $2,028 left in savings and the new lease is $381. Before I'm into this lease 6 months, I'm out of my savings (10 and a half years).
If I pay cash, I have a vehicle (providing 15,000 miles annually) I could drive 11-12 years (175k miles) without major problems. I found this website pretty interesting on high mileage Hondas http://www.hondabeat.com/highmiles.php
Inflation Projections - you estimate lease payments increase 8.33% every 3 years (2.78% annually). I am guessing this may be a tad low. When leasing, you are entirely at risk for inflation - when you buy at today's prices you lock in that price for as long as you are able to keep that vehicle running.
teke if you are new in the business consider saving even more by either buying a vehicle a couple years old or buying out an existing lease.
I have owned American cars and they have held up very well ( I traded in my cherokee with almost 200k in miles.) According to the book, "The Millionaire Next Door" most millionaire's buy, not lease.
Dobe,
Any German/Italian cars in that mix that you may have left out?
Haha. I'm very familiar with that car (not personally of course, strictly through envy!).
Dave Ramsey says never (f)lease a car. The only person who wins on that bet is the dealer. He also says cars take the biggest deprecation hit in the first 4 years, so look for one that is just a bit older. Perhaps one of those cars that someone leased for 3 years. They've taken the brunt of their depreciation and they've been taken care of pretty well because the guy leasing the car knows he can't screw it up or he'll pay through the nose for it. Finally, he also says that rich people don't make payments. They pay cash for their cars. They've realized it's stupid to pay interest on an investment that constantly depreciates.
So, in short, pay cash for a gently used car.
This is a fun conversation, but Teke, Man, this should not be something you should need to consult a chat room about in our line of work.
I like what Doberman and Spiff both said. Buy a Honda or Toyota (or Acura/Lexus if you need to for your reputation ) that's a few years old. Find a good indy mechanic (stress GOOD), not the dealership. And then drive the thing until your grandkids can inherit it.
I am sure we've all seen it, but there are people out there that have $800-1,000/mo. in car payments, on top of the high insurance for the newer cars. And they say they just "budget it like a mortgage payment, since everyone has car payments forever." Uhhhh, no. I must say, this is one of the few places where Suzey Orman earns her money. That and credit cards. Talk about wealth drains.....
I drove a crappy old Volkswagon for 12 years. I could have afforded anything I wanted, but lived in NYC, so your cars get trashed. My staff (that made 1/4 of what I made) would laugh at me. But you know what, that's why I have never financed a car - ever. And those guys are still paying $600/mo. for their newest whatevers, and can't buy you a beer without putting it on their credit card.
I now own a used Honda Accord. Love it (boring!).
Dave Ramsey says never (f)lease a car. The only person who wins on that bet is the dealer. He also says cars take the biggest deprecation hit in the first 4 years, so look for one that is just a bit older. Perhaps one of those cars that someone leased for 3 years. They've taken the brunt of their depreciation and they've been taken care of pretty well because the guy leasing the car knows he can't screw it up or he'll pay through the nose for it. Finally, he also says that rich people don't make payments. They pay cash for their cars. They've realized it's stupid to pay interest on an investment that constantly depreciates.
So, in short, pay cash for a gently used car.
What, you don't like Dave Ramsey? His message is pretty simple, mostly biblically based, and doable for the average person. I don't always agree with what he says, but in this case I do.
Gently used is the way to go (other guy took the biggest hit from depreciation, yearly excise tax, insurance etc...) Cars, even domestics, are built so much better than even 10 years ago that 150K miles s/b no problem w/o major repairs.
I have a philosophy of doing the opposite of one of my neighbors. He just bought a brand new Toyota Sequioa, We bought a 4 yr. old Town and Country. We paid cash. He says his rate is "prime minus a half." Uh oh.
He scolded me back in 2003 when he bought his house when I mentioned that there's no guarantee the real estate market continues to move due north. In fact, he scolds himself for not having the foresight to take out an interest only loan like some of his "smart" friends. We refinanced the house we bought in 1998 into a 15 yr. fixed.
We talk about investing for retirement and college. On top of his 401-k I mention that he might want to set-up an automatic savings program w/ a 529 or some good funds such as Fairholme, Janus Orion and Oakmark Global might not be a bad idea. He tells me that mutual funds aren't "sexy" enough for him. He takes another advance against his home and invests with a local guy who runs what he calls a hedge fund. Returns 20% per year, every year. I ask what he invests in. My friend does not know. Uh oh.
It really is true.
When Ramsey and Orman spout off a quick answer to every question, there is a potential to oversimplify. None of us meet with our client for 20 seconds and then give the recommendation on what is right for them, but that is what happens on radio all the time.
On top of that, another problem with Ramsey is that people believe everything he says comes straight out of the bible, so it must be true in every circumstance. I had a client argue with me that he didn't need life insurance, because Ramsey said it is a waste of money (haven't heard this myself, but I don't listen to Ramsey much either). My side of the argument was that he had 3 kids, uneducated stay at home wife, very nice salary, and no savings. His argument was "Dave says." I am assuming he it taking this out of context, and hope for his kids sake that (1) he doesn't get himself killed, and (2) that they grow up to be smarter than he is.
Dave Ramsey is big on Life insurance. He shills for zanderdirect. His thing is 20 yr level term.
Suze Orman is great for the 35 year old that makes 35K per year, has 7 credit cards, a car payment, a mortgage, no life insurance, and 3 kids at home. She is very good for people that need serious financial overhauls, not people like most of our clients. Her disciples DON'T need a financial advisor, they need counseling. They are people that spend too much, and can't control it. So yes, term insurance, pay down CC debt, use no-load funds, get your company 401K match, all that stuff. Good basics, but she isn't really speaking to the higher NW folks.
Same with Dave Ramsey. His version of asset allocation is 1/4 Large, 1/4 Small, 1/4 Mid, and 1/4 International. That's great for that same 35 year old just starting to invest in his 401K, but not much else. He does a great job convincing people that the obvious is something new and exciting and worth buying his book to learn. I've read his book, taken his class ($100), and listened to his CDs. He's not taught me anything new. I think his success, probably like Suze Orman, is based on his selling ability and public speaking skills, not the content of his discussions. If he can get thousands of people to pay his company $100 to take his 12 session class to teach us things we already know, he's the best salesman around. His website is pure marketing.
I'm not a "Dave Ramsey says" guy. On this topic of leasing vs. buying he makes some valid points. That's the only reason I brought him up.
With all due respect, despite her crusade to get America out of credit card debt, which is fine by me, Suze is often a moron and a hypocrite. Dave Ramsey, while usually simplistic, does a lot of good and (1) is OK with paying for investment advice and (2) unlike Suze, is not an annuity basher. I had a lot of misconceptions about him before I read his book and moderated his 13-week FPU program for a church. Whenever a client asks for a credit counseling referral for a wayward child who's in over his head financially, I recommend the parent pay the roughly $100 tuition to get the child into the program and usually, get excellent feedback. Occasionally, the child refuses to stick to the program and fails out. Sometimes, as Spears says, you can't cure stupid.
If your clients are saying "Dave says", you should at least read his book to know what he's REALLY saying. I've had to correct several misconceptions, such as "Dave says I should withdraw my 401(K) to pay off debt" or "Dave says I shouldn't have a mortgage" or "Dave says insurance is just a waste of money", et al. Dave says nothing of the sort, but if you don't know what he DOES say, you can't correct your clients. He's certainly more conservative than I am (other than being fairly bullish on our economy and the stock market) and his message is maddeningly simple, but it works more effectively than just about any personal finance course I've come across. A few Bible verses won't kill anyone either...there's actually some wisdom in that book for those of you who haven't read it...
...and before anyone gets the idea that moderating his program is a good marketing tool, I'll tell you that there is a very strict rule about not approaching any participant in any way shape or fashion with for-profit services. I don't even tell participants what I do for a living (although it usually gets out during the course of the program). This is simply community service and a good way to (1) find out what your clients are talking about and (2) give back/pay it forward.
Who knows...you might even pick up an idea or two that you find personally useful.
...and as a business owner, I leased a new car, knocking roughly a third off in taxes...deducting lease payments, insurance, maintenance, gas, plates, even car washes. I want to present a reasonable image of success and not worry about the car dying on the side of the road when I'm taking a client to lunch. Dave and I don't agree on EVERYTHING...
Speaking from a financial POV only the reliability of most cars, American or other, makes leasing the right answer for very few. 25 years ago most cars were buckets of rusty bolts by 50k miles. These days, with some care, most cars can reliably go twice that distance. Most owners will have only 50k or so by the the time the car is paid off. Then take a break from car payments or another lump sum payment until deminishing returns set in. And that can be years off.
Personally, I' ve had great luck with Hondas, getting over 100k miles without any problems on several Accords and Civics. For that matter, without any trips to the shop for anything more than routine maint. Last year I had an 03 Civic in the fleet buy the farm with 117k on the clock. The guy who caused the crash apologized. Still, I had just put $1200 into the car to get it ready for its second 100k of doing 150 miles a day ferrying my younger daughter back and forth to work and school. I got $10,500 from the insurance company. I paid 14k for the car in August of 03. I was out of pocket $3500 plus $1200, to go 117,000 miles. I like that math! And if it had gotten wrecked two weeks earlier I would have saved the $1200.
Obvioulsly with the mileage we rack up leasing wouldn't work, but looking at the math of owning these cars that can be driven reliably 100,000 miles or much more, leasing hardly makes sense from a financial POV.
But, then there's passion! Where do I sign!
Car quality, from a scientific point of view, is not a contestable topic. Toyota makes the highest quality cars, followed by Honda. Period. Better than BMW, better than Ford, better than Ferrari. From an SPC/TQM standpoint, it's a fact, not opinion....the Big 3 really missed out on Demming/Jung back in the day - Toyota capitalized.
Icy, I'd say that you can, more than likely, always drive a Honda further than a Toyota....so perhaps the Honda just might be better. The car that lasts the longest, with the most miles, is the best ...in my book.
It use to be Ford vs Chevy, now it's Honda vs Toyota.
While the quality control experts may say Toyota is better, nothing beats beating the crap out of one to get the real answer. Ok, The only car I beat the crap out of is my Grand Cherokee. I'm still washing mud off it from last weeks's kayaking trip. However, we do put a lot of miles on cars. Our 07 Camry odo shows 28,000 miles on the clock. It's 14 months old. It's been to the shop twice for extraordinary maintenance and it now has to go again. This time for a severe dash rattle. Something has come very loose behind the HVAC/radio stack.
Oh god. What kind of clients do you work with (if any) to make you go through such an exercise?What you DIDN'T factor in was if it was a BUSINESS LEASE and those payments can be an "above the line" tax deduction for the business owner. Why not let the government pay for your car?You didn't factor in the fact that MOST people drive more than 15k miles per year. What happens when you go over 15k miles? You drive your very own expensive taxi.I think you would be happier working for a CCC-type of company than being a financial advisor to people who have money and have made smart decisions with their money so far. (CCC = Consumer Credit Counselor)