Buying vs Leasing a Car – Episode 205

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have the president of Partners for Prosperity and our co-host, Kim Butler with us today. And we’re going to be reviewing an article that is by Jane Bryant Quinn and she is a personal financial expert and writer of the book, How to Make Your Money Last, and she has published this article in the July-August edition of AARP Magazine. And what she wants to discuss today is whether or not it makes sense to lease

[01:03] versus buy on a car and whether that decision changes with your age. Welcome, Kim. Well, hello, Todd. How interesting that you found an article by Jane Bryant Quinn. She is somebody that I used to pay attention to literally 25 plus years ago. I thought that she had some good ideas around finances. And interestingly enough, she ended up writing or her team ended up writing me a letter at one point because of some of the things that we had been talking about as it related to whole life insurance. And she disagreed with the things that we had been talking about. And so that was sort of the end of it. But how funny that she would come back full circle. So I’m curious, what does she have to say about the lease versus buy a car idea?

[01:57] Well, her opinion is, is it’s a question of budget and lifestyle. And she has given two classic rules. One is to pay the least over the long run, buy the car outright. So now she’s adding in a third category, lease, buy with cash, or buy with financing. So I think that’s important. I think she’s really comparing three things, even though she only thinks she’s doing two. But lease, if you want to drive a better car than you can afford to own. Oh, my gosh. Well, whoa, something’s wrong right there. But we’ll just roll with that for a minute. So the challenge with the lease company is that you have to know there’s another middle man in the deal. Like there’s the person or the company that owns the car.

[02:47] And then there’s a company that leases the car. And so clearly, from a consumer standpoint, there are extra costs. Now, I guess maybe someday one could argue that there would be some business benefits or something for leasing a car that was more than you could afford or however it is that she worded that. And I’ll readily admit that there are definitely some people in business that can write off a larger percent of their lease payments than they would be able to write off mileage or some of the other ways that the government allows us to write off vehicles for business purposes. So I’ll readily admit that for some business people, the lease might prove to be a slightly more efficient environment.

[03:37] But again, generally speaking, any time you look at a lease, you’ve got another middle man involved. And that means more money out of your pocket. And I think she attempts to kind of go over some of the negatives of the lease. And she mentions acquisition, documentation, and title. Those are similar, I think, for both. I have bought and leased. I was thinking you’d pay for those on both. I was thinking that there was some type of a sales tax that usually is applicable on a lease that’s not applicable. Don’t you pay like a monthly tax or something on that payment? I think you’re correct. Or maybe sales tax is calculated differently on a lease or something. I’m not certain. And the biggest issue with the lease,

[04:25] and I think this is just common sense for anybody who’s ever had one, is that you’ll pay penalties for driving more than 12 or 15,000 miles in a given year unless you purchase additional miles up front. And if you purchase additional miles up front, at some point you’re pretty much up to the same amount as the payment. Right, absolutely. So that’s a general no, in my opinion. And the lease negative impact of the miles is huge. I mean, that’s just such something for people to be careful about, and then they’re not, and you can’t always control it. And it’s, I think, one of the bigger areas that causes people trouble. If you want to give up the car before the end of the lease, you’ll owe early termination fees that might run to several thousand dollars.

[05:18] And number two, a crash that totals a car is considered early termination. Interesting. Oh, that’s not so good. And the one thing that she does mention is that if you buy gap insurance, GAP insurance, this has been the best insurance I have ever had in my life, because I was in a situation just like that. I had a six-week-old car that had depreciated $10,000 from the time I had bought it and totaled it. And the only reason that everything got paid off was I had put the GAP insurance on it. So I must admit, I am a fan of that. It’s not very expensive. Interesting. So yeah, I can understand that. And yet at the same time, it does add expenses. So if you’re going to go into a lease, just make sure that you really get a handle on all of the costs.

[06:10] There’s usually first and last month’s payment. There’s, like you said, potentially extra titling costs or something. Sales taxes handle differently. GAP insurance, I know two leases often require different car insurance than when you own a particular vehicle. So lots of things to consider there. Her last point is that in relationship to the age question, that a lot of times as you get older, you will be working less, so you will be driving less miles. Now, I got to admit, I would say that half the people I know, that’s true. And I would say that the other half drive more miles than they ever have in their lifetime because they have additional time to do it. I would agree. I cannot stand things that are made based on age recommendations

[07:01] because I think it, first of all, just doesn’t take our own personal consideration into the impact. But second of all, it just assumes that you’re going to sit at home and do nothing. And that’s just not a good assumption. Super. Well, Kim, before we wrap up today, I wanted to just maybe we might got a new list or something because we haven’t had this conversation in a while. We’ve got a gift that we’d like to give off to our listeners and our listeners only. Absolutely. That’s an e-book that we’ve written called Financial Planning Has Failed. And it talks about a lot of the things that we’ve discussed, things like mortgages and how to most efficiently handle them, things like cars, things like the life insurance,

[07:43] things like alternative investments that we like to work with that are not in the stock bond and mutual fund arenas. And so lots of good information in there. It’s an audio version. It’s partners number four, prosperity.com slash e-book. And there’s a printed version there as well. But that’s where you get your gift. Partners number four, prosperity.com slash e-book. Super. And again, before we wrap up, I would just to address the one thing that she’s not really showing in this article, but that’s the discussion of paying cash versus financing cars. I just think we can’t leave without touching on that. I’m sure glad you brought it up because it’s so important that we understand, even if we pay cash for something, we’re still in effect financing it.

[08:30] We’re effect, we’re financing it with our future finances. Because to pay cash for something means that you have that cash saved up. And so arguably today’s interest rates really low, so it’s not a huge finance cost. But if you have, say, 30 to $50,000 saved and you pay cash for that car, that’s now 30 to $50,000 that is no longer in your savings account earning money. And so it’s one of the reasons that we look at cash value of life insurance. Now, interestingly enough, there are car financial deals, in other words, car loans out there today that are at very low interest rates, legitimately low interest rates, like 1.9 or 2.9, something like that. And so you have to look at that. And oftentimes, borrowing from the car and from the car financing company at,

[09:27] say, 1.9% is the best way to, quote, finance your vehicle. Because if you pay cash, if that cash came from an investment or something that was earning anything more than 1.9%, then that’s not a good deal. So it’s something that you have to look at very carefully. The rates do matter. And sometimes borrowing against your cash value of life insurance costs 5% or 6%. So in today’s world, that’s not a good strategy. What I do want people also to be aware of is that many times when the dealerships offer 0% financing, what they’re doing in that case is they’re actually adding the interest to the price of the car. So they’ll take a $30,000 car and let’s say there’s $4,000 worth of interest, they’ll just add that interest to the price of the car, call it a $34,000 car,

[10:24] and then tell you that it’s zero interest. So you want to make real sure that you’re not getting sucked into that deal, thinking that you’re paying no interest when in actuality, all of your interest was just added up front. Again, this is a little bit more complicated of a discussion. I think even Jane Bryant Quinn has brought into it. And again, it’s not something that you have to, I guess, think about again and again. But I do kind of like the idea that each time that you decide to get a new car, which I’m amazed at how efficient newer cars are. I mean, you literally used to have to trade cars every couple of years or go through some high repair bills. I’ve never seen such amazing cars as what are on the roads today.

[11:14] They seem, at least mine do anyway, seem to run forever. But anyway, I think it’s great to the idea of look at each one separately and see what the deals are that are available out there on a lease, on a purchase, on using dealer financing versus using your own financing. And as your life circumstances change, what you did four years ago may not make the most sense now. Yep, really well said. And that’s something that if people are curious about, we’re happy to help with. Hello at partners number four, Prosperity.com. Give us the facts on your car situation and we can lay out the best financial strategy for you. Super. Again, this is No BS Money Guy Todd Strobel. Special thanks to Kim Butler and special thanks to all our listeners.

[12:03] See y’all soon. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.