Not bad, I initially think. But let's keep digging.
Let's bring in the real life situation. The last friend I met had just leased a cute turquoise 2016 Prius.
Here's how the purchase went down. The bank pays $25,000 to the car dealership, and my friend signed a contract with the bank to lease the bank's car for 3 years. In the contract she agreed to two things:
A. To pay for the car's depreciation over those 3 years.
B. To pay a money factor (think interest on a loan) to compensate the bank for letting you use their car.
That's $6,000 every year. Put that $6,000 in an index fund and let those dollars work with their 7% long term growth for 30 years and you will end up with $650,000! And we are just talking from a freaking car purchase!
Think about the people that continue down the 3 year on-going lease path. In just 10 years they've lost $60,000 to a bank so that they can sit in a more shiny car for 3 years (or $100,000 if contributed to an index fund).
The only time it would make sense to lease the new car is if the Honda Fit had $18,000 in mechanic fees in 3 years. And the likelihood of that happening is small.
So Why Do People Lease New Cars?
It's obvious now that the benefits of leasing a new car has no relation to stashing money to give you more freedom to do the things you love. So why would someone lease a new car?
These are some of the common reasons leasees may tell you they lease new cars:
1. There's a lower cost up front.
2. You get to drive a better car for less money.
3. You will totally save money on maintenance costs.
4. You can build your credit with the payments.
All of those statements are true. But each statement is missing the bigger picture.
1. There's a lower cost up front, but in just the 3 year term the cost is much, much higher.
2. Would you rather drive a better car for less money or have $650,000 in your bank account in 30 years to do more of what you love? You pick.
3. Maintenance costs may be less expensive, but that's only on a line item basis. It's like saying, "The cups at this wedding venue are cheaper, so let's pick this wedding venue." You got to bring the comparison out to the full picture.
4. You do not need a car lease to build your credit. You can build your credit in hundreds of better ways. Like using a credit card for all your regular spending and paying it off on time. Or using a credit card to purchase a used car and paying that off on time.
With all those seemingly rational reasons proven irrational, then why?
A person leases a car because 1) They incorrectly believe that the lower upfront cost saves them money or 2) That sitting in a new car somehow accomplishes the American Dream or 3) They understand the math and don't mind the losing the extra $18,000 every 3 years.
If it's number 3, then I am all for it. Truly! If you value sitting in a shiny car that much after recognizing its cost then you are following what you love. And I am for that. But I'd bet that way more often than not people lease under misconception number 1 and 2.
So What Will You Do?