Why I Disagree With Suze Orman About Leasing a Car
Never Say Never
Suze Orman hates car leases:
“I personally think you should never, ever ever ever, lease a car, do you hear me?”- Suze Orman
I hear you Suze!
In most cases, for most people, I agree with Suze. Car leases are often a bad financial decision because to use her words again “you’re pouring in money each month with nothing to show for it at the end of the day.” When you lease a car, you don’t own it, it’s more like you are renting the same car for an extended period of time. So Suze is not wrong, you “pour” money into the car each month by making your lease payments and at the end of the lease, you have nothing to show for it, because you do not own the car.
Or do you….
Buying Out Your Lease
Many people are not aware that at the end of your lease, you have the option to buy the car outright. The price you can buy it out for is generally referred to as the residual value and is typically determined at the time you sign the lease. The residual value is determined by the leasing company and factors in the expected depreciation of the car over the term of the lease.
Your residual value is different than your market value, which is the price you could see your car for on the open market. If the market value of your car is significantly higher than the residual value, it might make sense to buy out your car. The other potential benefit of buying out a car at the end of the lease is the fact that you know the car’s history. You have presumably been the only driver of this car which means you know two things better than anyone else.
- If the car has had any mechanical issues and;
- If you enjoy driving the car
If you got a relatively low buyout price, you have had no issues with the car and enjoy driving it you might want to strongly consider buying it out.
Sneaky Fees Involved In Leasing A Car
Interest. While this isn’t really a “Sneaky” fee (it should be advertised up front) you should be aware that you often have to pay interest on your lease. The rate you pay will vary depending on your credit, the leasing company and overall interest rates in the economy. Beware interest rates on leases, if the rate is too high this can make leasing a bad financial choice.
Purchase option fee. This is a very sneaky fee, which I hate and personally think regulators should put an end to. Remember when I said the market value of the car could be higher than the residual (buy out) value at the end of the lease? Well, don’t think the leasing company isn’t aware of that possibility and to protect themselves from potential lost profits often add in a fee that you are required to pay on top of the residual price. The house always wins…
Disposition Fee. Even if you decide not to buy the car at the end of your lease, you will likely have to pay a disposition fee. The intent of this fee is for the leasing company to cover its costs of reselling the vehicle. So you pay a fee if you buy out the car and you pay a fee if your return the car. The house always wins.
Excess Mileage Fee. The biggest factor in determining the depreciation (and thus the residual value) of your car is how many miles you put on it. This is why most leasing companies specify how many miles you can put on the car over the term of the lease. If you go over that mileage, they will likely charge you in the range of 10–40 cents per mile you go over.
So for example, if the leasing company says you can drive the car 60,000 miles over a 4-year lease and you end up driving it 70,000 miles. You are 10,000 miles over your limit could be on the hook for $1,000–$4,000 in excess mileage fees, if you decide to return the car. These fees typically do not apply if you decide to buy out the car at the end of the lease.
Damage fee. If you return the vehicle with a dent in the bumper, a cracked windshield or any other damage, guess who’s paying to fix it?
Right about now, I’m starting to agree with Suze, it looks like its “never, ever, ever” a good idea. In many cases, leasing is a bad idea, but not always.
Leasing My Car Was A Fantastic Financial Choice For Me
The combination of my credit, the promotions running at the leasing company and the historically low-interest rates when I signed the lease, made it a slam dunk decision for me.
I was able to get a 0% lease which brought my bi-weekly payments below $98 (Canadian dollars). I was able to get a residual buyout value that was $2,100 below the market value and reasonable purchase option fee.
I fully intend to buy the car out in a year’s time as I will be getting it below market price, I enjoy driving the car and have never had an issue with it. That means I don’t need to worry about damage or mileage fees and best of all since I’ve known for 3 years what my buyout price will be, I’ve been able to save up enough to buy the car in cash at the end of the lease.
This will be a truly special day because it will mean I will be officially (non-mortgage) debt free! I’ll keep saving up for my next car in one of my 8-savings accounts, and if all goes to plan I will say goodbye to car loans forever!
So, while I generally agree that in most cases leasing can be a bad way to go, there are certainly cases (like mine) where it makes all the financial sense in the world. The most important thing is that you do your homework, crunch the numbers, evaluate all possible options, look for the hidden fees in the fine print and make the best choice for your particular circumstances.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.