Leasing creates the illusion, not reality, of wealth

Hand putting small red car into piggy bank

Americans are leasing a record number of new cars and trucks — more than 1 in 4 of the new vehicles rolling off dealer lots.

That's not an encouraging trend.

Leasing is popular because it offers lower monthly payments than traditional auto loans and allows buyers to drive a more expensive, luxurious car than they could afford to buy.

But by the time they cover all of the up-front costs and extra fees for additional miles or excess wear-and-tear, they often wind up spending more than expected with nothing to show for it.

Leases are just another way automakers and lenders try to claim a big, never-ending piece of your paycheck.

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."

To consider why leasing is so tempting, look at a deal we saw on the 2015 BMW 328d sedan — a sporty, turbo-diesel luxury car anyone would love to drive.

With a sticker price of $42,450, let's say you tried to buy that vehicle with a traditional 48-month loan at 3% interest and with a 10% down payment of $4,245.

Your payments would be a checkbook-draining $845 a month — out of the question, right?

2015 BMW 328d

2015 BMW 328d

Or you could take advantage of the 39-month lease BMW was offering, where the monthly payment was only $369 with $4,164 cash due at signing — a $3,000 down payment, $795 acquisition fee and your first monthly payment of $369.

(We're not including the sales tax and fees for titling and licensing the car because you'll pay pretty much the same whether you buy or lease.)

So, for the same up-front cash, you could lease that BMW with realistic monthly payments.

What's not to like?

Let's move forward 39 months when the lease is up and it's time to turn the car in.

You would have spent just over $18,000 with nothing to show for it except an empty garage.

That money is gone, and we're assuming that you haven't driven more than an average of 833 miles a month (or 10,000 miles a year).

Return the car with more than 32,500 miles on the odometer, and you'll pay 20 cents for every additional mile.

Say you changed jobs during your lease, and your commute got longer. Or what if you wanted to take a couple of big road trips? An extra 5,000 miles means you'll need to pony up another $1,000 to get rid of the car.

We also hope you've been very neat and careful. If your toddler spills chocolate milk on the backseat or a jerk scratches your car in the parking lot, you could face hundreds or even thousands in additional fees for excess wear-and-tear.

5 simple steps to best deal

If you're in the market for a new car or truck, you need the right information and a savvy negotiating strategy to drive away with the lowest price and cheapest loan. Without that, you'll wind up paying thousands more than you need to — almost guaranteed. Let us show you how to be a smart, confident buyer.

Realistically, you probably just spent $20,000 in just over three years, and now you're probably going to lease again and start another round of monthly payments.

What if you had bought a very nice midsize sedan, a Ford Fusion or Honda Accord, that cost a little more than half as much as that Beemer?

With the same cash investment and monthly payments, that car would be paid off, or almost paid off, and you'd have it to drive for as long as you want with no more monthly payments.

Spending more than necessary on cars is one of the biggest wealth killers for Americans, and leasing enables many consumers to make that mistake.

The only way you can save more is to earn more or spend less, and one of the biggest expenses you have total control over is the vehicle you drive.

So how do you know how much you should spend on a car? What's truly affordable for you?

We like 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 let's say you're making $45,000 per year and have $5,000 to use as a down payment.

If you consider that your insurance and maintenance will run $100 per month, your monthly car note should not exceed $275.

At an interest rate of 3%, it means you shouldn't borrow more than $12,500.

(Click here to check Interest.com's database of the best car loan rates from scores of national and local lenders.)

Add in your $5,000 down payment, and that means you can spend $17,500 on a vehicle without putting your finances in jeopardy.

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.

Bill Hammer of Hammer Wealth Group in Melville, New York, says the best thing to do is buy a lightly used vehicle, then drive it for 10 years.

If you do that and pay it off in four, you'll have six years every decade with no car note.

This frees up money during those years to save more for retirement and even put away more money for the down payment on your next car.

Going years without a car note puts you one step closer to financial freedom.

"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."

The bottom line is that while leasing may give the illusion of wealth, it won't help you build true wealth.

Living within your means is the foundation real financial security is built on.

  • Pat

    Nope... u didn't make a mistake:)
    I don't wanna keep anything that is depreciating. This is a car we're talking about... not property. No matter what the car, you will lose money. I may as well pay for just the depreciation, instead of getting into a long finance deal with the bank/dealership. Just my 0.02.

    • scott

      Thats what I was thinking then i doubt myself and think what money I would be saving with lower ins lower registration and then selling the car and getting something back later. I am soo confused. I have under 2 years left to make a decision

      • Fitzgerald Darbone

        Don't stop leasing, you will regret it.

  • Fitzgerald Darbone

    I could not have said it any better. Owning a depreciating asset is the SAME THING as spending money. Also, most people don't understand to use a lease as a tool to build your credit.

  • Fitzgerald Darbone

    You should not be anybody's financial advisor Craig, especially on automobiles.

  • Justin

    the only fear factor of leasing a car is turning it in with damages/excess wear and tear/over mileage. That's why all dealerships have a warranty of up to $5,000 in lease damage forgiveness .. the warranty usually only adds $20-30 a month to your payment (which is entirely worth it). if you return the car all beat up and the inspector determines you have $4500 in damages, guess what? you're off the hook. but say you are over your miles, have huge dents/scratches, torn interior, etc. ... and you didn't get the warranty, and you're probably gonna get hit with 5 grand in damages, then you can just buy out your lease (buy the car). every lease has a lease to buy option in the contract. however, this would be a worst case scenario. unless you like to treat your car like dirt, and don't care if it gets beat up, scratched, crapped on, whatever .. then don't lease. but other than that, this article is nonsense. if I don't want a car payment, I'll drop 3 grand on a Craigslist car and drive that for a while. however, if you have the income and a steady job, who wouldn't want to drive a brand new car every 3-4 years? And pay a lower monthly payment on it then you would on a long term purchase loan?

  • Mike Sinyaboot

    I completely agree. This article is ridiculous. You are going to lose that $18,000 whether you lease or finance. Short of a limited run supercar, you will lose money on a new car as it is a depreciating asset. At the end of those 48 months, that BMW will still be in your garage but it will have lost an incredible amount of value along with an expired warranty which could result in extremely high repair bills should something go wrong. This is especially true with an German luxury car. It is always going to be better to lease high end cars. To pretend otherwise is just plain stupid.

    I love changing cars every 3 years. I also take extremely good care of my cars. I have never had an issue when turning one in. While there is nothing wrong with doing it, I could never drive a car for 10 years. It is not even an option worth considering for a lot of people.

  • Thatmanoverthere

    The author of this article was trying to help people see the difference between obtaining the outward appearance of wealth by leasing expensive vehicles and building wealth by owning less expensive vehicles and driving them for longer periods.

    It seems that some readers came away with hurt feelings or maybe they missed the point. Leasing expensive cars is fine for those who can readily afford it. However, many people who cannot afford expensive cars fall into the trap of leasing them because the dealership makes them less costly to lease rather than to buy.

    The take-away message is do not buy or lease cars that are beyond your means. Then, depreciation will be less of an issue. Or, like me, buy three or four year old well maintained cars where most of the depreciation has already been taken by the original owner.

    In general, I find it a losing proposition to lease anything that I need perpetually. Thus, I don't lease my home, car or appliances.