Suze Orman, renowned for her candid financial advice, recently criticized CNN’s Chris Wallace for leasing a car, stating that it’s “the biggest waste of money out there.”
Yet, the lease versus buy debate isn’t as black and white as it’s often portrayed. Wallace defended his choice, claiming that leasing was cheaper and more convenient, sparking a conversation about the financial implications of both options.
Is Leasing a Car a Bad Option?
Leasing a car typically offers short-term cost benefits due to lower monthly payments than auto loans. However, the long-term picture is different. Leasing obligates you to a residual value, estimating the car’s worth after the lease ends. Cars that retain at least 50% of their original value post-lease are considered ideal.
For instance, a $40,000 car depreciating 50% in 36 months would yield a $20,000 residual and a monthly payment of around $555, cheaper than the average auto loan payment, which currently stands at $736.
Yet, leasing doesn’t provide ownership at the lease’s end, echoing Orman’s viewpoint about it being a money drain. Owning a vehicle involves significant costs. The average new car price is $47,215, while used cars average $26,533.
Financing a purchase entails interest charges, with new and used vehicle APRs averaging 7.6% and 11.6%, respectively. Poor credit might lead to higher rates, up to 14.8% and 21% for new and used cars, respectively.
While owning a car incurs higher initial expenses, it offers ownership at the loan term’s end, providing more extended value, as Orman advocates. Long-term, owning a car and using it until it’s no longer viable becomes the most cost-effective approach.
The Advantages to Leasing
Leasing presents advantages like driving cutting-edge models, excellent fuel efficiency, and manufacturer warranties. Wallace highlighted the worry-free experience of driving newer vehicles every few years. However, leasing’s expenses extend beyond monthly payments, including acquisition fees and potential penalties for exceeding mileage limits or vehicle wear-and-tear.
In essence, while leasing appears appealing for lower short-term costs, it might not save money over buying in the long run. Calculating long-term implications, considering individual needs, and running financial analyses is crucial to determine the best fit.
This comparison underscores that the lease-versus-buy decision isn’t straightforward, emphasizing the importance of individual financial situations and long-term goals in choosing between the two options.