I got a question from one of my readers out in Denver, who is in the market for a new car. He wanted to know if leasing a car would be a smart plan or not, or if he should buy a used car instead. (Thankfully he’s been reading my blog enough to know that buying a new car probably isn’t the best idea). He had seen some advertisements for leasing, with a monthly payment of like $160 per month and figured to lease a brand new car for that price seemed pretty smart. I advised him against it but didn’t have the numbers to back it up. I went home and did some math and have some interesting numbers to share with you.

What is leasing?

First of all, let’s define what leasing a car really is. In the past you could only buy a car; either new or used. If you didn’t have the cash to pay for all of it, you could take an auto loan out. In today’s world, you can basically rent a car and it’s called leasing. You put some money down and then pay a monthly rental fee and you get a brand new car to drive. The lease will typically last 24 or 36 months and you’ll give it back to the dealership. Some people re-lease another car when they turn it back in, and find themselves in a leasing cycle. Certainly doesn’t seem like a bad idea!

Is leasing for everybody?

No. I won’t go so far to say that leasing isn’t for anybody though. Certain financial situations could make leasing a car better. Plus, some people don’t mind paying a little extra and avoiding the hassle of buying/selling, and let’s be real; having a brand new car is pretty sweet. The purpose of this article is to break leasing down in a way that anyone can understand it, and to point out many ‘fine print’ items that people may gloss over when signing the lease for $129/month.

What are some of the fine prints?

In addition to the monthly lease payment, you’ll also be faced with the following charges:

1) Excess wear and tear: Leased vehicles are often expected to be returned in mint or near mint condition. Normal wear and tear that gets a little obnoxious could be fined extra.

2) Mileage maximums: Leases will often spell out that you can only drive 10,000-15,000 per year. Anything over that could be charged as much as $0.25 per mile, and that can add up.

3) Down payment: People will get all excited when shopping for leases, “I can afford $129/month!” What some of us will forget is that a down payment is required to lease a new car, and it’s often $1k and up.

Let’s walk thru a real life example. Since my reader was in Denver asking about it, I chose a local Volkswagen dealer  (because VW has got some pretty sweet cars in my opinion). I figured a VW Jetta would be a good model to look at leasing; a vehicle right in the middle of the price spectrum.

There is a 2014 Jetta available for a 36 month lease. It’ll be $129 per month. On the surface, $129 is very doable for most budgets. As we talked about above, then there are the extra fees: it’s $2,349 due at signing as the down payment, and you are only allowed to drive 10,000 miles per year. That down payment equates to an additional $65 per month, so your monthly payment is more like $195 per month.

Let’s say you decide to lease the 2014 car and end up putting 1,000 additional miles per year on it (10,000 miles isn’t all the much) The extra 1,000 miles will cost you $0.25 per mile. That’s an additional $750. All told, when you turn it back in, you’ll have paid $7,743 and have to turn the car back in. That makes the ‘true cost’ $215 per month.

Or, for a comparison, you could buy a used car. I found a 2011 Jetta (3 years old) with 23K miles for $13,983. That used Jetta is fairly comparable to a leased car turned back in after 36 months (just with less driving).  A brand new 2014 Jetta will cost you $27K. So in 3 years, the Jetta has depreciated by $13,000. Wow. That’s why I don’t recommend buying a new car. I suppose spending $7,743 to lease it would ‘lose’ you less money than the $13K depreciation. I found that a bank is offering about a 4% interest rate right now on used car loans. If you ended up buying the used car with the same $2,349 down payment for 36 months (same as lease); your down payment would be $344 per month. Bump it up to 72 months and your payment is $182 per month.

So, where does that leave us? You could lease a car and essentially end up paying for half of its value by the time you turn it back in (you’ve paid $7,743 vs $14K for a 2011 car). You would have nothing to show for it, because you would have just been essentially paying “rent” on the car. Or you could pay about the same for a 3 year old car and after 3 years of driving, have ‘equity’ of $7K and own half the car.

All about the equity!

Equity means ownership. If you chose to go the route of buying a used car, with every monthly payment, you would have more equity, as the car would be yours. If, for about the same payment each month, could earn equity in something rather than just renting it and seeing nothing for it, earning equity certainly seems smarter to me.

The decision is ultimately up to you and you’ll have to weigh the pros and cons. I hope that this post broke down the numbers a little bit more for you and showed you that a lease is so much more than just $129/month.

Thanks for reading! Here’s another one you might enjoy!

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