Car Leasing Pros and Cons

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.

Time is of the essence, and distance: Are you a cross-country tripper who’s going to own old Betty for the next decade or are you a day tripper who’ll want to trade her in for a new model? These are crucial factors. If you’re going long distances over the long term, buying is the far better option. Cars are reliable work horses these days.

Plus, go beyond about 12,000 miles on a leased vehicle and you could end up facing hefty fees. Ranging anywhere from 5 to 20 cents per mile, those penalties can add up quickly. Say you drive 3,000 miles more than your lease allows, and you’re charged 20 cents per mile. When you turn your car in for a new lease, you’ll have to pay an extra $1,800 on top of any other fees.

It comes down to crunching the numbers. If leasing works the best for you, start by figuring out how many miles you want to drive each year, how long a lease you want and how much you want to put down. Then do some comparison shopping. Call a few different dealers and ask them to quote you a monthly payment.

Again, a used car is the most practical way to go. Now this may seem strange, but a used car could cost more upfront!

Really? Why would that be?

Used car loans are defaulted on more frequently, so you could be asked to put 10 to 20% down instead of ZERO to 10% on a new car. The good news is that a car loan can be easier to qualify for because the collateral isn’t going anywhere.

Safe driving to everyone on the road today!

Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts.  Additionally, she is a regular financial contributor and analyst for CBS News.