Why Leasing A Car Makes Sense For Young Families
The cheapest way to acquire a car is to pay cash for it up front. Unfortunately, paying for a car in its entirety is not an option for most young families. The choice then comes down to financing or leasing a car.
Let me start off by saying that young families shouldn’t be fooled by lower lease payments. There are, however, some advantages to leasing a car.
Leasing a Car: Advantages
- the monthly payments are considerably less than what you would pay if you financed the same car. The difference between leasing and financing a new Honda Accord is $125 per month
- taxes are only applied to the monthly payment rather than up front on the entire price of the car
- warranty coverage throughout the duration of your lease
- the option to return the car to the dealer or buy the car at the end of the lease
- avoid the opportunity cost of tying up your money in a vehicle
Leasing a Car: Disadvantages
It’s also important to understand the downside to leasing a car, namely:
- the longer your car is on lease, the higher your overall carrying costs will be
- you are restricted to a set amount of kilometres per year
- you have less freedom when it comes to servicing your vehicle and making any modifications.
Geoff Cudd from How to Buy a Car at the Best Possible Price, says that most of the time leasing a car is only a smart move when you can write off the payments as a business expense. Leasing a car for personal use will usually cost you more money than financing in the long run.
However, like renting a house for a few years, leasing a car can be a smart short term strategy for young families if you can’t afford to buy today. You might want to defer ownership if your financial picture will be different in a few years.
Leasing a car is certainly a reasonable strategy while you build up your savings. Just don’t use it as an excuse to get more of a car than you can really afford.
For young families looking for a safe new vehicle to get around in, leasing can help in the first few years while you get a handle on your finances. Make sure you have an exit strategy though – you don’t want to get trapped in a continuous cycle of financing or leasing a car.
Personally I’ve been taught to always finance instead of lease. To me it makes more sense to buy into something that becomes yours at the end. Leasing just adds too much extra money to the purchase. I’m sure there are some scenarios where it does make more sense though. I know my grandpa went his whole life always leasing a car. I’d hate to think how much he spent on all those lease payments.
Another down fall of leasing is the walk through with the dealer after your lease is up. Every little chip, scratch and blemish must be fixed and can add up really quick.
I’m not sure where everyone else lives, but in Edmonton they don’t seem to screen the sand they use on the roads. After each winter the front of my vehicles look like they went through a warzone with chipped paint and chipped windshields.
I’m definitely with you that paying cash for a car is the best approach. Those who can’t afford to do this might look at much cheaper used vehicles to avoid financing or leasing.
I think you’ve totally missed the mark. Your cost comparison on the new Honda Accord doesn’t say how much the downpayment or what the interest rate is or even how long the term is. All these things matter. Plus the smart thing to do is never to buy a new car anyway. Yes paying cash is always the cheapest but at the very least if you put cash down and get a zero interest deal you will own the car outright and not have thrown your money away on a lease. The different between leasing a car and renting a house is that cars are vastly more affordable to purchase outright than houses.
I agree that cash is the best way to go: my first car cost $1200 and I paid for it in twenties.
Even now that I make more money, we usually buy a used car (lease return – 3-5 years old), and pay whatever cash we have saved up.
But then you have to budget for, and expect, the occasional repair bill.
Since it seems most people are on the “pay cash” bandwagon, I will say that I support the part about it making sense for people that own their own company and can write it off. I have a friend who is a young geologist. Because he is a private contractor he can claim the leasing costs, and because of his high salary, it saves him quite a lot of money because of his high marginal tax rate. He is they type that always loves to have the newest truck, so it is a nice perk for him.
We all know that buying used and paying in cash is the better deal. I think it’s important to remember that while there are rules of thumb for personal finance, sometimes reality is a bit different.
Let’s be honest; there are plenty of new parents who find themselves without a safe, reliable vehicle.
Most people will have to borrow to buy a car, even a used one (unless you buy a clunker). Older cars are more susceptible to surprise repairs, and young families are less likely to have emergency funds to cover these costs.
There’s also the stereotype of the hot-shot executive leasing a $60k car every few years. That’s not what I’m talking about here.
Leasing can be a decent temporary solution until you’ve got your finances together.
I am looking to lease a car as well I have crunched the numbers and it looks better for me to lease than buy.
I quite agree that leasing a car is only advantageous for short term uses. Financing a car, however, can be a good investment for individuals.
I’m definitely with you that paying cash for a car is the best approach. Those who can’t afford to do this might look at much cheaper used vehicles to avoid financing or leasing.
I went for a completely different strategy. I leased my truck with the full intention of purchasing the vehicle once the lease was compelted. When I bought my truck new in 2009 the dealership was offering 4.9% to purchase and 3.9% to lease over 48 months. I chose lease because the interest rate was lower and you only borrow 1/2 the ammount and only pay interes on the portion you are borrowing not the full amount. Now for the balloon payment, I ensured to put away enough money each paycheque to payout the balance when my term is over in 2013. If you are able to put away enough money for the balloon payment at the end of the term, I believe this is a better way to purchase a vehicle as you are only paying interest on 1/2 the amount of the vehicle, and you can collect interest on what you are putting away to save for your balloon payment. Again this doesn’t always work for everyone!!
@Alex: It’s not true that you’re only paying interest on half the vehicle cost. For an explanation, see
http://michaeljamesmoney.blogspot.ca/2009/11/understanding-car-lease-payments.html
The guy who said there are advantages to leasing if the car is used for business is perpetuating a myth. This is absolutely not true. Leasing and financing are treated equally. Leasing is NEVER a better choice financially. Remember, it’s just a different way of saying “renting”, but for a longer time. If you can’t afford to buy it, you’re kidding yourself if you think you can afford to lease it. There are no tax advantages and dealers aren’t about to subsidize you.
Leasing works for short term rental,18 months is best . If you need 3 trucks or more for your company, CRA will give you a better right off. If you only need one truck, using your LOC is best.
No, no, no, no…… Leasing is never, ever, ever better than buying.
My first car was a lease. I needed a car but didn’t have money to put down on a car and didn’t have a mechanic I trusted to look over a used car. If I had picked up a dud, I didn’t have any way of knowing.
It worked fantastic for my first time around. I was brand new to vehicle ownership and didn’t have to deal with the long term consequences for my mistakes with that car. At the end of my lease, I paid for a minor low cost repair and handed the keys back to them. I had the money saved up to pay most of a new car that I still have.
I think a lease is a great solution for first time car buyers/new drivers. You screw up on the maintenance or hit curbs or go up ramps too fast, but someone else gets to deal with it later. You learn your lessons and buy a new car if you’ve thought to save up to pay for one.
I paid off this car 2 years after bought it and I’m still driving it 7 years later.