Why do some people lease cars?

Two weeks ago, it was 70 degrees and sunny. This week, it snowed in North Carolina. Spring is a fake season (maybe even a conspiracy). It is just winter and summer fighting. Fall is the superior season.

If you’ve been reading our letters for a while, you’ve realized that we are big fans of buying practical cars that last decades - the 2002 Toyota Camry is the undisputed king. However, we realize there are other options and that some people are “car people.” So let’s talk about why some choose to lease cars other than a Camry. 

People lease cars when they enjoy getting a new car every few years or want to try a new car for a longer period of time before buying. A car lease is usually a 24-36 month contract with a down payment, monthly payment, mileage limits, and purchase price.

When leasing a car, you can negotiate the down payment/monthly payment to find the price that works for you. Typically, the down payment and monthly cost of leasing is less than buying. However, you don’t get to keep the car at the end of the contract without paying the residual value. For this reason, leasing is more expensive than owning when analyzing the long term costs of continuing to lease cars compared to the lifetime cost of owning one car. 

Your monthly payment will include depreciation, interest, taxes, and fees. The fees may include a mileage fee and wear and tear. There may also be fees for early termination of the lease. 

A big benefit of leasing is the lack of maintenance costs. Most dealerships offer 2-3 year warranty packages that include regular maintenance. If your lease term is equivalent to your warranty, you won’t have to worry about the ankle biter costs like oil changes and air filters. 

The last pro to a car lease is the residual value. When leasing a car, you and the dealership agree on a purchase price for the vehicle at the end of the contract. Your monthly payments cover the difference between the current purchase price of the vehicle and the future expected price. That way, the dealership doesn’t lose money by loaning you the vehicle.

Essentially, the dealership is guessing what the value of your car will be in 2-3 years. Unsurprisingly, they get it wrong a lot. If your vehicle is worth more than the residual value, you’re in luck! You could purchase the vehicle for less money than its current market value, a rare situation in the car world. The dealership, wanting to sell that vehicle for its full value, may offer to pay you to bring it back to them or give you a smoking deal on a new vehicle lease. In reality, you’re just getting some of the money you already paid back…. But that is not a fun way to think about it. 

If the value of the vehicle is worth less than the residual value, you get to turn it in to the dealership, get a new vehicle, and not worry about the resale (that’s the dealership's problem now). 

Leasing vehicles is a great way to experience new cars while not worrying too much about depreciation. However, it is a more expensive way to get from point A to point B because you will forever be making monthly payments (assuming you jump from lease to lease). If you find a vehicle you love, you can purchase the vehicle at the end of the lease, but you will never get back the fees you paid during the lease. 

Dealerships love perpetual leasers as they are basically the subscription holders for a dealership. You will get better and better deals the longer you lease with the same dealership. It is not because they like you… it is because you are a loyal customer helping pay their salary. They wouldn’t offer leasing as an option if they didn’t make money off of you.

If you love having new cars, leasing is a relatively easy and predictable way to experience new models. It is more expensive in the long term, but you are free of many of the headaches associated with owning a vehicle. 

What We’re Listening To:

Podcast: The Life and Death of a Boeing Whistleblower. This podcast reviews the lawsuit and claims of a Boeing whistleblower who, after two days of testimony, was found dead in his car. I have ranted about Boeing’s failures multiple times. This podcast summarizes the cost cutting measures that led to the fatal and embarrassing incidents on Boeing aircraft, and one employee’s attempt to do something about it.

Debrief on Deck

Next week, we look at the 2024 performance of some of our favorite ETFs/Mutual Funds. While most did well in a record breaking year, a few stood out among the rest.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

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