Finance vs Lease: What’s the Smart Move?

But the lease payments for the car would be relatively cheap. It’s not, you know, not a BMW, you know, it’s like $200. Everything, you know, rolled into it. No fees are due at the beginning at the signing.
Gotcha. What would you do? I really appreciate you calling and asking the question. It’s because it’s a great question that’s on the top of a lot of people’s minds. So here’s the thing. Leasing a car is an alternative form of financing a car.

The Hidden Cost of Leasing a Car

So if we were to take the actual lease payments on the average lease, in your case $200, and you were to take the buyout at the end of the lease, those are the two financial numbers you would need to put into a financial calculator, and then you compare that with the sticker price of the car, the manufacturer suggested retail, and you would find that this money that you’re borrowing, that you’re renting, is costing you on average 14.2%.

Why Lease Rates Are Misleading

That’s the average lease yield. Now, a lease is not technically borrowing money, so the Federal Trade Commission does not make them reveal that to you. Were this a car loan, you’d get this little ridiculous federal piece of paper that shows you exactly what your money is costing you and what your annual percentage rate is, and if they were to do that on a lease, you would find the typical lease, it varies, but I’m saying the typical lease is around 14%.

Expert Findings: Leasing Costs More

And I’ve analyzed these things for 30 years and looked at them and run them through the financial calculator. Smart Money Magazine did a full exposé on them. Consumer Reports did a full exposé. Consumer Reports’ actual comment at the end of their full piece of research on a whole bunch of leases did a much more thorough job than I have done. Their quote at the end of the article was, the most expensive way to operate a vehicle is to lease it.

Why Financing Isn’t Much Better

And this is even if I’m going to finance a kind of five-year payment plan or something like that.
Well, number one, I’m going to tell you don’t finance anything. And if you did, coming out of this, I’m going to tell you to, we’ll come back to that in just a second, but I’m going to tell you to pay it off as soon as possible, not for five years, because that’s the second part of our equation. And then we’ll come back.

Millionaire Mindset: Change How You Think

In all the years I’ve been working with people who started from nothing and built wealth, we call them everyday millionaires. They started from nothing and became wealthy. They typically say one of the things that turned their life around was they started asking, when they started looking at purchasing something, they started asking how much. So rich people ask how much broke people. And I’ve been both, brother. Okay.

Break the Debt Mentality

Broke people ask how much down and how much a month. In this entire conversation, all you’ve talked about is how much down and how much a month. So you’ve got to stop that, dude. You’ve got to start asking how much, because that’s the part that kills you.

How much down and how much a month says I’m going to be in debt to the man, and I’m going to pay payments to the man the rest of my life, and I’m going to be normal, which sucks. And you don’t want to do that. So we broke down why the lease is a bad idea. How much looking at analyzing these decisions based on your monthly rather than the total purchase price is a bad idea.

Marty’s Situation: Financial Snapshot

Now let’s back up and look at your particular situation. How old are you, and what do you make?
Okay. I’m 30 years old, and I’m bringing in about 125 between me and my wife. Oh, good for you. Great. Congratulations. And so how much money do you have? How much money do you have saved? Not counting retirement. So I’d say 25,25,000. You have, like, a little emergency fund or a little miscellaneous savings account with 25,000 bucks in it.

Best Move: Pay Cash for a Used Car

Okay. And the used car you were considering purchasing was how expensive? What was the price on it?
I’m looking around, but I would say $14,000 or $15,000. Okay. Just write a check and buy it. Just write a check and buy it. Out of your $25,000. And then… We’ll write a check right now. When you get ready to turn the lease in…

Maintain Your Emergency Fund

when you get ready to do that. You got $25,000, buy a $15,000 car, that leaves you $10,000. Then your next order of business in your budgeting and financial plan is to rebuild your emergency fund, because 25 is probably about the right amount. And I want you to get it back up there.

Student Loans: Clear It Quickly

Do you have any other debts not counting this car situation?
I have a student loan, but my parents are taking care of that.
Is it in your name or their name? Relatively low.
It’s in my name.
How much is there? It’s relatively low. My whole schooling was like $35,000.
How much is in your name in student loan debt?
I don’t even know, but I would go $10,000, $15,000.

Well, I would love for you to go get rid of that as soon as you can, too.
And so would your mom and dad, by the way. You make $125,000 a year; I appreciate that they’re taking care of it. If they’re a day late, it dings your credit. If they’re a month late, it starts to step on your credit. If they get in real trouble, it’s your loan. You’re going to end up paying it. That’s the legality of it. And so if I were you, I would want that cleared out of my name as soon as possible.