﻿If you’ve been to a car dealership recently, there is a good chance the sales people tried
to get you to lease a car. And most often they make it sound so appealing. A brand
new car with low monthly payments. Much lower than if you were to buy the car with a loan.
You could imagine yourself just driving out the parking lot with that shiny new ride. However,
what they don't tell you is that there are some major drawbacks to leasing a car. So in today’s
video we are going to discuss the truth about car leasing. Why it might not be the best decision for
you when you are thinking about acquiring that next vehicle. Hi, if you are new to the channel,
my name is Tae from Financial Tortoise. Where we learn to grow our wealth, slow and steady.
Let’s first talk about why leasing a car is so tempting. For one, the monthly payments are often
lower than if you were to purchase the same car with a loan. This is because you’re only paying
for the depreciation of the vehicle during the lease term, plus any interest and fees. You’re
not paying off the entire value of the car like you would with a loan. If you are tight on cash,
this is super tempting. You not only get to drive a brand new car, but it feels like you
are getting a deal with a lower monthly payment. Another reason people are tempted to lease is
because you get to drive a brand new car every few years. With a loan, you’re stuck with the same car
until it’s paid off, which will be at least several years. And when the car is paid off,
your car no longer has that new car feel you felt when you first purchased it. But with a car lease,
you get to enjoy that new car smell every 2 to 4 years. What more can you ask for right? Another
reason leases are so tempting is that some leases also come with maintenance packages that cover
things like oil changes and tire rotations. If you get annoyed by the constant oil change
expense and small maintenance fees you have to pay for every time you visit the maintenance center,
this too is also very tempting. And last is no resales worries. When you are done with the lease,
you simply return the car. You don’t need to worry about finding a buyer or go through the hassle of
selling your car. The only thing you have to worry about is paying any end-of-lease fees, including
those for abnormal wear or additional mileage on the vehicle. So, as you can see, there are some
definite advantages to leasing a car. That is, if you are only focused on the items we just talked
about. Let’s talk about some drawbacks to leasing. And some big ones at that. The first biggest
drawback of leasing a car is you aren’t building any equity in the car when you are leasing.
Yes, cars depreciate in value overtime unlike a home. A well purchased home will appreciate in
value over time. But pretty much all cars are worth less today than they did yesterday. So
it probably isn’t the best place to try to build equity if you are trying to build wealth. However,
when we compare the lease to loan, at least with the loan, each monthly payment is bringing you
closer to owning the car outright. When you’ve paid off the car loan is yours. Free and clear.
But with a lease, you never own the car. At the end of your lease term, you simply turn in the
keys and walk away. There’s no equity to trade-in or sell when you’re done with the car. And if you
decide you want to keep the car, you’ll have to pay a hefty purchase price to do so. Or you
have to start the process all over again with a new car lease. Therefore when you lease cars,
you are always making car payments because you are just jumping from one car to another. So,
if building equity in a vehicle is important to you so you can one day outright own it,
leasing is definitely not the way to go. The second major drawback to leasing a car is that car
leases often have very specific terms. And terms that are hardly ever in your favor. For example,
most leases have a mileage limit. Generally, this limit is anywhere between 10,000 miles and 15,000
miles per year. If you go over that limit, you’ll be charged a per-mile fee. For every mile that you
add to your annual mileage, you can expect to pay anywhere from 10 cents to 50 cents per mile extra.
And those fees can add up quickly. If you’re someone who has had to travel frequently over the
course of your lease agreement, you can expect to be paying substantially more out of pocket
for these terms. According to the Department of Transportation the average driver drives around
13,500 miles per year. So if you happen to be above the average, you can expect to pay quite
a bit in mileage penalty when you are ready to turn your car in. Most leases also require that
you get the car serviced at specific intervals and only use certain types of oil and filters. If you
don’t adhere to these terms, you could be charged a hefty fee when you turn in the car. And lastly,
leases typically have very strict guidelines about what types of damage are considered “wear
and tear” and what type of damage will result in fees. Should your car have any damage or wear and
tear that has reduced its overall functionality or appearance, you can expect to pay additional
fees for this as well. These types of additional leasing terms and expectations can often be what
makes or breaks the leasing experience for many. If you don’t want to have to deal with paying
extra when something comes up for you, it’s best to buy a car rightout instead. The third major
drawback to leasing a car is that car leases are not easy to exit and when you try, you are hit
with a hefty penalty. Leases are typically for a term of two to four years. And during that time,
you’re locked into making monthly payments. If you decide you want to get out of the lease early,
you will be hit with a hefty penalty. This penalty is typically equal to all the remaining monthly
payments on the lease agreement. So, if you have two years left on your lease and you decide to
exit early, you can expect to pay all 24 of those remaining monthly payments as a penalty.
And that’s not even including any other fees or penalties that might be associated with early
termination. Thus most often, people are forced to see the lease through till the end whether
they like it or not. I know of many people who want to improve their finances by getting rid of
their current car payments. Unfortunately they realize too late that they are stuck in a car
lease contract that has outrageous penalties for canceling early. If you’re someone who likes to
have the flexibility or simply wants to be able to get out of their car lease agreement without
penalty, then leasing is definitely not for you. The fourth major drawback to leasing a car is that
leased car insurance costs are often higher. When you lease a car, the leasing company will
require that you carry full coverage insurance on the vehicle. The dealer wants the car back
eventually in good condition, so they will require you to insure it with good protection. And full
coverage insurance is not cheap. In addition, many leasing companies also require that you
purchase additional insurance coverage like gap insurance. Gap insurance covers the difference
between what you owe on the lease and what the car is actually worth in the event that the car is
totaled in an accident. And this coverage can also be quite expensive. When you are leasing, you have
less say on a lot of your financial decisions. Decisions like how much insurance to have or not.
So, again if you’re someone who likes flexibility and is looking to keep your car insurance costs
down, leasing a car is probably not the best option for you. The fifth major drawback to
leasing a car is that you are not allowed to do any modification to a leased vehicle. Are you the
type that likes to make alterations to your car to customize it for your personal preference? Or
maybe just something small. Like tinting your windows because you like privacy. Well if you
are leasing a car, the probability that you can make such modifications is low. If you do make
even small modifications, you’ll likely need to revert it back to its original state. Such as
removing the tint from your windows before taking it back to the dealer. Leasing companies want the
car returned to them in the same condition as when it was leased because they need to think
about resale. So any modification that you do to the car will likely come with some penalties
or even possibly void your lease agreement. So, if you’re someone who likes to personalize their cars
or likes to modify them for any reason, leasing again is probably not the best option for you. The
sixth major drawback to leasing a car is the fact that car dealerships highly market car leases.
Almost to a point of annoyance. When we lease a car, we are essentially just renting the car from
the dealership for a set period of time. And at the end of the lease, we have to give the car back
to them. So, in essence, we are just giving the dealership money month after month with nothing
to show for it in the end. And car dealerships know this. That’s why they are always trying
to push leases on unsuspecting customers. It is ridiculously profitable for them. The dealership
makes money on a car lease in several ways. First, the dealership will mark up the price of
the vehicle above what it is actually worth. This difference between the actual value of the vehicle
and the selling price is called "residual value." The higher the residual value, the more money the
dealership will make when the lease is up and the car is returned. In addition, the dealership will
also charge interest on the lease. This interest is called the "money factor." The money factor is
similar to an interest rate, but it's typically much higher. So, not only will the dealership
make money on the difference between the selling price and the actual value of the car, but they
will also make money on the interest charged on the lease. All in all, it's a pretty sweet deal
for the dealership, but not so much for the person leasing the car. My general rule of thumb is this.
When a product is so highly marketed, I can’t help but be suspicious of why. Most often the
company isn’t marketing them so they can best serve their customers. Rather they market it
because the margins on that product are so high compared to their other products. Be wary when you
are being sold certain products. You aren’t buying the product because you want it. Rather you are
buying because of the marketing, That’s it guys. Hope this gives you some additional information as
you are weighing your options between buying and leasing. If you would like to learn more about how
car expenses affect our personal finances, check out my video here. Until next time, all the best.