I’ll cut straight to the point. Cars are a pretty lousy investment.
Most of us do actually need one though, so we buy one. We’ve got kids to lug around, or golf to go play, or work to go to. Maybe you just enjoy driving around on the weekends, picking up hitchhikers and killing them before they kill you. I won’t judge you for that last one, I’ll leave that up to a real judge.
We lie to ourselves when we call a car an investment. What kind of investment loses 20% a year, practically guaranteed? What type of investment has high operating costs without spinning off a hint of cash flow? What kind of investment needs to be insured in case it damages other people? A car is not an investment. It’s pretty much the furthest thing from an investment. Why do we lie to ourselves about it? More on that later.
I’m not going to get too in depth on buying a car, or whether you should buy new or used, since that’s a whole new post. The only advice I’ll offer a prospective buyer is that financing a car is a very bad idea. You’re paying interest to buy something that not only goes down in value, but also has an operating cost every month. Wealthy people don’t pay interest to have liabilities. You shouldn’t either.
Instead, we’re going to talk about something much worse: leasing a car.
How Does It Work
Urban legend is that Canada’s own Jim Pattison basically invented leasing as a way to sell more cars back in the late 1950s. I’m certainly not going to do the 74 seconds worth of work to verify this, so let’s just go with it.
When you lease a car you pay for the right to drive it for a specific period of time, with 3 years being the most common. After 3 years you have the option of buying out the car (for a price agreed to when the lease begins) or giving it back to the dealer. Since the depreciation levels are fairly predictable, the buy out price is usually at a higher level than what the car’s expected to be worth. Since nobody wants to pay more for a car than what it’s worth, they simply trade it back in and lease another brand new car. No fuss, no muss- unless you break one of the rules of the lease and have to pay a penalty. There are lots of them, so make sure you read the fine print before you sign that dotted line.
There are all sorts of advantages to leasing. The monthly payment is less than buying the comparable car, since you’re basically only renting it. There’s basically no repairs to speak of because the vehicle is so new. People are willing to pay a premium to drive something that’s without headaches. This is why leasing will always be popular.
How Much Is Putting Up With Crap Worth?
I drive a 2002 Ford Focus. My understanding is that, as a group, the Focuses made during the early 2000s aren’t exactly giving Toyotas and Hondas any competition for the most reliable. It’s a pretty average car.
Over the past 5 years, I’ve spent a total of $5104.87 on repairs and maintenance. This doesn’t include oil changes, gas or insurance, because those are costs associated with having any car. I’ve had everything done from a new battery to new tires. I’m in the repair shop a couple of times a year, which will happen when you drive a car that’s almost a decade old.
If I leased a car for $250 a month over the past 5 years, I would have paid $15000. In those 5 years I would have driven something next to new the whole time and not had to deal with any repair issues. I would have also paid nearly $10,000 for that peace of mind. That’s just not worth it.
The Payment Is There Forever
If you lease, you’ve basically thrown up your hands and admitted you’re having a car payment forever.
It’s like renting a house versus buying it. Yes, you can become a wealthy renter. It’s not impossible. But yet, for some reason, there’s a strong correlation between house ownership and wealth. The next millionaire renter you meet will be the first. The homeowner realizes that there’s a value in owning a house. Besides the obvious value of the house, there’s an additional benefit- someday the homeowner will be able to live there mortgage free.
A part of financial independence is ownership. Once you own your house and the mortgage is paid, nobody can take that away from you. And by extricating yourself from a monthly mortgage payment you’ve gained freedom. Those dollars that were dedicated to housing can now go somewhere else. You’ll never be financially free if you continue to make a monthly payment.
And that’s the crux of the problem I have with leasing. For as long as you lease, you’re indebted to someone. For as long as you lease you’re paying a premium to avoid repairs. And for as long as you lease you’re paying a car company interest for the convenience of driving something new.
Remember how I talked about why people call their vehicle an investment? The answer should be simple after reading this post. If a car is an investment, then it makes it that much easier to finance it, lease it or pay extra for a useless feature. After all, it’s an investment. You’re not paying extra, you’re making an investment and investments are good.
So congratulations on leasing a car. At least it’ll always look good in the driveway.