A Great Reason to Lease, Not Buy, a Car
June 23, 2007
KMC is a thirty-something family man with a wife, three year old daughter and one on the way. After graduating college with $5,000 in credit card debt and $9,000 in student loans, his new wife finally got him to shape up and get fiscally responsible. He went a little overboard and developed a serious interest in personal finance. He currently writes about the topic at Advanced Personal Finance, keep up on his writings with his feed
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When it comes to their money, some people do inexplicable things. I came across an appalling figure the other day. The average length of a car loan today is 70 months – nearly six years! Now couple that stat with the fact that, on average, people only keep their cars three to five years. If you do that, it doesn’t take a calculator to figure out you’re digging yourself into a hole.
Upside Down
Being ‘upside down’ is the term used to describe when you owe more on something than it’s actually worth. When you’re talking about cars, it can happen surprising easily.
As a rule, new cars immediately lose value as soon as they’re driven off the
lot. It takes several months or even a year of payments to owe less than the resale value of the car. For that period of time, you’re upside down. The longer your loan term, the longer it takes to get to the break-even point.
So it seems that what more and more new car buyers are doing is not entirely paying for a car before they turn around and sell it. Then they buy another car and roll the old loan balance into the new loan. After a few cycles of this, you’re driving a Chevy with a Mercedes-size loan.
The Numbers
To put numbers to the point, let’s say you want to buy this nice new Toyota Camry with a loan of $20,000. If you finance for five years at 6.24% (what my bank offers), you’ll be paying $3,333 in interest over the life of the loan. If your loan term is three years, total interest is $1,770. Financing for the longer term nearly doubles the interest you pay.
If you decide to trade in that car after four years, you still owe over $4,000 on the loan. No problem – just roll that into the loan for your new car.
Do this a couple of times and you’ll quickly be driving a car worth half what you owe on it.
Lease Instead
Since evidently a great many people are doing just that, it seems they should be leasing instead of buying. At least at the end of a lease you don’t owe any money (assuming you fulfill the terms of the lease). Not only that but you’ll be able to afford more car than you would by buying outright.
Like I said, people do unbelievable things when it comes to money.
All posts by Ben Edwards
How about saving up and paying cash for a car that you can afford.
You need transportation, you don’t need to impress anyone.
My favorite line about vehicles is tie:
“Noone casres what kind of car you drive when they need you to give them a ride”.
Think about it.
I’d rather sink my money into appreciating assets.
Have a great day.
Tyler
Or, you could do like I did, and buy a car that was about a year old and had a minimal number of miles on it, pay it off completely, and then keep it until there was a real need for a new car. I have had my pickup truck for 7 years now, and plan on keeping it until I have children and have a need for a little more “inside the vehicle” room. I would keep the truck for dump runs and things like that, except that (a) I don’t actually need to have a truck 95% of the time and (b) don’t have anywhere to store it. At least it gets good gas mileage.