Leasing promotes illusion, not reality, of wealth
We're leasing more new cars and trucks these days.
Experian reports that more than one in every four vehicles were being leased by the end of 2013, the most in seven years.
But while leasing might offer lower monthly payments and seem like a cheaper option than a traditional auto loan, it's usually not.
By the time you cover all of the up-front costs and extra fees for additional miles or excess wear-and-tear, you'll wind up spending more than you expected and own nothing.
Cars can be wealth killers, and leases are just another way automakers and lenders try to claim a big, never-ending piece of your paycheck.
"I think many people lease so that they can drive better cars than they can afford," says Bill Hammer Jr. of Hammer Wealth Group in Melville, New York.
Indeed, that's why most people who turn to Swapalease.com aren't trying to get out of cheap contracts on Hondas or Chevys. They're trying to escape $600-a-month leases on BMWs, Mercedeses and Acuras.
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."
The only way you can build financial security is to earn more or spend less. And one of the biggest expenses you have control over is the vehicle you drive.
Use the 4/20/10 rule. It says you should finance a vehicle for no more than four years, put at least 20% down and spend no more than 10% of your income on transportation expenses.
So if you earn $45,000 per year, have a $5,000 down payment and consider your insurance and maintenance will run $100 per month, your monthly car note should not exceed $275.
At an interest rate of 3.5%, this means you shouldn't borrow more than $12,000. (Click here to check Bankrate's database of the best car loan rates from scores of national and local lenders.)
Add back in the $5,000 down payment, and you have $17,000 to spend on a vehicle.
It's not the end of the world to go a few thousand over that limit for a good vehicle, but you need to be realistic about what you can afford.
Average car loan rates
Source: Interest.com weekly survey of major lenders from August 13, 2014
|Type of financing||Interest rate|
|36 months new||3.96%|
|48 months new||3.97%|
|60 months new||4.03%|
|36 months used||4.71%|
Learning to live within your means is the foundation that financial security is built on.
Hammer says the best thing to do is to buy a lightly used vehicle, then drive it for 10 years.
If you pay it off in four, you'll have six years every decade with no car note.
That will allow you to save more for retirement and even put more money aside for the down payment on your next car.
"It can really pay off in the later years when you have no monthly payment," Hammer says. "You'll only have insurance [and maintenance]. You'll free up some money for savings."
Consider the case of a $250 car note. Pay it off in four years, bank that money for the remaining six years and you'll have $18,750 in the bank when you're ready for your next vehicle.
Plus, you may still have a few thousand bucks of equity left in your vehicle.
Pay a $250 lease, roll over to a couple more leases, and at the end of those 10 years you will have $0.
Auto analysts report that most vehicles rolling off assembly lines today are built to run well past 100,000 miles without a major breakdown — think engine and transmission trouble.
That's why automakers are offering longer drivetrain warranties — from 5 years or 60,000 miles (at Ford, Honda and Toyota, for example) to 6 years or 70,000 miles (at Buick, Acura and Lexus) and even 10 years or 100,000 miles (at Hyundai and Kia).
Monthly lease payments are often lower than loan payments because that's the key selling point.
But these are complex contracts with lots of ways to recoup more money from buyers, often at the very end of contract.
Start with the mileage limit, which is typically 12,000 to 15,000 miles per year.
Go over that and you'll be hit with a penalty fee of 10 to 25 cents per mile.
If you change jobs or move during your lease and your commute gets longer, an extra 5,000 miles on the odometer will translate to an additional $500 to $1,250.
If your toddler spills chocolate milk on the backseat or a shopping cart scratches your car in the parking lot, you could be charged hundreds or even thousands more for excess wear-and-tear.
And if you want to walk away from your lease, you could be on the hook for an early termination fee plus remaining lease payments.
Bottom line: Although leasing may give the illusion of wealth, it won't help you build the true, lasting wealth we all want.