For a typical consumer, leasing a car does not make financial sense compared to buying one. A car lease is designed to befuddle you with complexity and hidden fees that obscure the full ownership cost.
What is a car lease? It’s really a car loan with the added twists of the end-of-lease value of the car and contingent fees, such as excess mileage and wear and tear, being specified up front. The monthly cost of the lease is determined by the interplay of the purchase price, the terminal value, the implied interest rate, the term, and any upfront down payment.
With a lease, you pay for the depreciation of the car but do not build any equity in it.
Seems complicated? It is. Do you know what these terms mean:
- Capitalized Cost
- Acquisition Fee
- Money Factor
- Disposition Fee
If you don’t intimately understand these terms — and you can be sure your car dealer does — then you’re at a disadvantage in your car leasing negotiation.
My favorite term is the money factor, which is a complicated way of expressing the implied interest rate in your lease (yes, you are borrowing money). To convert the money factor into your interest rate, you need to multiply it by 2,400. Does it sound like Babylonian mathematics? It does to me.
When you lease a car, you are almost certainly unaware of the implied borrowing cost and without knowing this interest rate, you can’t compare the lease terms to a loan. Why not simply call it an interest rate and present it in an understandable fashion? The question answers itself.
Anytime you see a transaction with this level of complexity, that’s your tell that you’re financially outgunned and should proceed at your financial peril. You’re facing an information asymmetry where the dealer knows much more about this complex financial transaction than you do. That rarely ends well.
I understand why some people lease — the monthly payment is lower than a loan with an equivalent term. But, that is a false comparison. When a car loan is paid off, you own a car. When a lease is paid off, you own nothing. You may even owe additional fees for excess mileage or wear and tear.
So, if your crazy uncle is telling you to lease your next car, don’t listen to him. You’ll end up paying more than if you simply purchased the car with a loan.