Is it better to lease or purchase my car?
Ellis HammondPro Member
Investor · Leawood, KS · Member since 2017 · 178 posts · 108 votesIs it better to lease or purchase my car?
Most Popular Reply
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8yAlmost always the best decision is to buy a used car that’s 3-6 years old.
It depends what’s important to you. Investing, financial freedom etc or having nice stuff. It’s rare that you can have it all. I know people who are worth millions and they drive at best used cars or a used car that’s newer (think 3-5 years old).
I don’t know anyone who’s a millionaire who drives a Mercedes. Typically people who drive that type of car are high earners who have low net worths.
3 percent of luxury car owners in the US are millionaires. The biggest factor keeping Americans from building wealth is a car payment. There’s no equity in it.
End of my rant
127 Replies
- Rental Property Investor · Oklahoma City, OK · Member since 2015 · 66 posts · 21 votes8y
Control assets, rather than liabilities. Most of the time, a vehicle isn't an asset.
Now I am a hypocrite in this sense; I drive an old pickup.
- 8yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
I currently own three cars. Two I purchased new, the only two new cars I have ever bought or will ever buy. The third is a collectible sports car from my high school days that I bought last year because I hit a financial milestone. I have more than 350,000 miles on my cars.
Leasing means renting. You make a monthly payment for as long as you own your car. You never pay it off, the payment is always there. I choose to own outright, and drive them into the ground.
- Investor · Cambridge, MA · Member since 2013 · 264 posts · 104 votes8y
Neither - move closer to get work / get ebike... Especially in a place with weather like SD!
- Rental Property Investor · Glen Cove, NY · Member since 2016 · 109 posts · 25 votes8yHow about using the BRRRR method in car buying... This is what I plan on doing with my current car. Let me know what you all think: I purchased my car used almost 4 years ago from a motivated seller with low mileage and under market value. I now own it free and clear but have 28k (my purchase price) equity in it. I can still get at least 23k for the car, hoping 24-25. (I also only put about 5k miles a year on this car). I will use a fraction of this money towards a newer car and use the rest towards RE investing. I want to find the same type of under market value, low mileage, used car for around the same 28-30k range. I will purchase with minimal money down and a low interest rate (2-2.5%) from a credit union. Now I am back into a newer car and the bank is holding the loan for me for 2.4% or so (basically free money as far as Im concerned) for 3-5 yrs or whichever loan life gives me the best rate. Do it again with another great value used car purchase after a few years and basically I have owned a very nice car for $4,000 over the past 4 years AND pull a large percentage of the equity out of my car before it depreciates any further. This 18-20k can be invested in Real estate which will yield me a higher % then the cost of interest on a used car loan. If i were going to bank it, of course this method would not make sense.
- Rental Property Investor · Johnstown, PA · Member since 2017 · 71 posts · 42 votes8y
Originally posted by @Caleb Heimsoth:
Almost always the best decision is to buy a used car that’s 3-6 years old.
It depends what’s important to you. Investing, financial freedom etc or having nice stuff. It’s rare that you can have it all. I know people who are worth millions and they drive at best used cars or a used car that’s newer (think 3-5 years old).
I don’t know anyone who’s a millionaire who drives a Mercedes. Typically people who drive that type of car are high earners who have low net worths.
3 percent of luxury car owners in the US are millionaires. The biggest factor keeping Americans from building wealth is a car payment. There’s no equity in it.
End of my rant
That's super interesting! The Millionaire Next Door comes to mind. I love when people assume because you care about what things cost, you must not have a lot of money. No, I have money because I care about what things cost and decide what I want to spend my money on.
- Novato, CA · Member since 2018 · 6 posts · 1 vote8yOne positive for leasing is lower debt to income ratio. I’m leasing two cars, one is worth $50,000 and the other $30,000. When banks run my credit, they only see what is owed on the lease, which is $10k per vehicle. Hence, lower debt to income. If I were to purchase/finance the entire purchase amount for both, banks would see a total debt of roughly $80k. That would make me less qualified for a home loan. Maybe I’m missing something, but I’m in contract on a home now and I can clearly see leasing helped my debt to income.
- Rental Property Investor · Lansing, MI · Member since 2017 · 48 posts · 22 votes8y
I lease because trucks are stupid expensive, but when you lease them you can get a nice payment for a brand new rig that doesn't break down at all. And I will argue that you actually are getting as good of a deal as if you were to buy it new!!! Let me show you what I am talking about (also I think this ONLY works for full size trucks)...
1st I plan on buying the truck outright so I don't care too much about miles....
I leased the truck for 3 years w 10k miles per year and I pay $253 (0 down) per month for the lease. If you add that up then you get $9108 for the term of the lease. Then when I was getting the lease I was very particular to know what the buyout price is (this is preset, it has nothing to do with the condition of the car when you turn it in). In my case the buy out is $28k. So if you add that up you get a total price of $37,108. The sticker on my truck was $47k, its a nice truck but not top of the line (nothing crazy fancy) but it lets me have no limitations of the materials I can pick up myself so when I see deals on housing materials I can go grab them right away. (i.e. perfectly good cabinets that someone is selling on facebook)
Also much better fuel economy than a truck that I could have bought with cash (~$10k)
For BMW or something like a 4 door sedan this most likely doesn't work.....
- I would immediately find a wealthy mentor and ask them what they think. In my life I never got financial advice from people who are not wealthy. When I sit down with wealthy mentors I have never once heard them talk about a leased car or an owned car. Raise your sights and you won’t waste your time with these crazy conversations. Just my two cents.
- Dallas, TX · Member since 2018 · 12 posts · 4 votes8yBuy a car outright using a HELOC (5% prime) Dealership will give a great deal if you buy it outright and don’t use their financing and you can use your leverage that way and you can pay it off quicker
Originally posted by @Caleb Heimsoth:
@Matt K. don’t forget insurance. That usually costs more with leasing.
You’re free to do whatever you want. I’m just saying what works for me. My next car will likely cost less then 10k, probablt 5-7. The one after that I will probably spend more on as by then I should be at or close to 1M net worth.
I agree with Caleb, Not only is insurance higher on a leased car, as some point with old cars we drop collision which is about half the cost of the insurance. I have no self-worth tied up in how new my car is. We are currently on assignment in Germany, they gave husband an Audi Q5, it's such a pain in the *** to park we wish we'd been given a SmartCar! I walk/take trains/ride my bike wherever I need to go. We will be sad to have to purchase two cars when we return to the U.S. Might just make do with one. We like 2-3 year old cars.
Originally posted by @Eric A.:
I would immediately find a wealthy mentor and ask them what they think. In my life I never got financial advice from people who are not wealthy. When I sit down with wealthy mentors I have never once heard them talk about a leased car or an owned car. Raise your sights and you won’t waste your time with these crazy conversations. Just my two cents.
It's been a long time since I read it but I'm sure "The Millionaire Next Door" talks about how wealthy people often DO NOT buy the most expensive cars.
15 years ago my son's 5th grade class won the fundraising prize and got to go in limos to a mini-golf place. I was a chaperone. All the kids in the car were saying "I'm going to have a limo take me everywhere when I grow up! I'm going to be rich like Britney Spears!" My son, and his friend (whose mom is an investment advisor) were all disdainful of the other kids...."A limo is a stupid waste of money" and "Very few people get as rich as Britney Spears". I was so proud. :)
- Investor · Pittsburgh PA · Member since 2018 · 102 posts · 76 votes8y
@Ellis Hammond to answer your question about leverage. I purchased a Honda Accord for $5200 cash in 2002 drove it for 11yrs then was totaled @197k w/some transmission issues and received $1800 back. Also saved on insurance cost by having liability and putting aside the difference for the next car. I prefer purchasing from private sellers: job transfer, growing family, got company car, stuck with a car they no longer use. Luxury cars are easily obtained using this principle. My current car, BMW 328xiDrive was purchased 4 yrs old with low mileage and 9 months of full warranty left for $14.3k 4yrs ago. Most people thought it was new, still look and drive great. I like the freedom from car payments and the negotiating leverage that comes from telling the seller that you can give them same day cash.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Ellis Hammond:
@Matt K. @Joe Splitrock @Caleb Heimsoth @Twana Rasoul what if we weren’t talking luxury cars?
VW instead of BMW for example.
I realize luxury leasing is still a big expense but trying to see what makes sense for the avg American or maybe the average investor here on BP.
Seems like summary so far is buy used. Are you still financing that purchase? Depreciating it to close to zero?
If you are asking what is the lowest cost, then buying used and driving for many years is the least expensive option. If you want a new car every few years, then leasing is generally better. That is because the majority of the value is lost in the first 3 years, so if you plan to sell after 3 years, then it is just better to lease.
It depends on what you value. Some people responding to these car discussions are making emotional purchase decisions. They want to drive a new car or a sports or luxury car for enjoyment. These are not financially better decisions, just emotional decisions. There is nothing wrong with that, but recognize that you are doing it for fun, don't think leasing any car has lower cost of ownership than buying a sub-$10K used car.
There is a local taxi company that I have used in the past. All of his taxis are used, generally 10 year old Chrysler minivans. He buys them with a little under 100K miles and drives them to over 200K. They are cheap, reliable, easy to repair and have lots of room. It is a low cost, high utility purchase. Is the guy driving the Uber X BMW SUV driving a nicer car? Of course he is, but who is making more money in their business?
There are even less expensive options for transportation. Some people mentioned the bus or a bicycle. You could get a motorcycle. Back in the 1970's it was common for a family of 5 or 6 to have just one car in the family. Now families of 3 or 4 will have 2-4 cars. There is a big difference between what we need and what we want. It is all about priorities and goals.
- Cincinnati, OH · Member since 2016 · 146 posts · 104 votes8y
Background - spent six years running Jaguar Land Rover in Cincinnati where this is a common question for high income earners.
The most important step is to pick a vehicle you want, and that you believe will be beneficial to your business and your personal life. Then determine the avenue that is the most financially advantageous. For instance...with three kids under 7 I MUST have a van, with three kids under 7 the van WILL be destroyed in 3 years. After three years, my wife WILL NOT continue to drive with goldfish crackers falling from the headliner. So we lease....but we lease because it is also the most financially advantageous.
Toyota Sienna typically has a future value that outperforms the predicted residual. That is the key, high residual % or low residual % at lease inception DOES NOT MATTER other than it lowers your payment. If you want flexibility in your lease and the ability to get out early, you need a vehicle whose value out performs the residual. The Sienna general does, as this is our third and we have only kept one for even 24 of the 36 month term one time.
Also they have a low money factor, this is the interest your pay on a lease, a five digit decimal, in this case .00006. Multiply this by 2400 to compare to a more traditional interest rate so 0.14% on the Sienna. While I could get 0% to buy for 60 months, i am committing to purchasing the entire vehicle, not just a portion. When my 36 months is up, the equity in the vehicle is mine to recapture....very important to remember...if your buy out is 20,000 and the market trade value is 23,000 that equity is yours to use toward your next purchase. If the reverse is true and the buy out is 23K and trade value is 20k....you can turn it in and walk away! If you wreck it, have it repaired, but still are leery of the damage, you dont have to own it forever, turn it in and walk away!
However if your money factor is say .00325 as it is on many high end luxury vehicles like a Range Rover and your effective interest is 7.8% you might want to consider financing.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Originally posted by @Chris Marsh:
One positive for leasing is lower debt to income ratio. I’m leasing two cars, one is worth $50,000 and the other $30,000.
When banks run my credit, they only see what is owed on the lease, which is $10k per vehicle. Hence, lower debt to income.
If I were to purchase/finance the entire purchase amount for both, banks would see a total debt of roughly $80k. That would make me less qualified for a home loan.
Maybe I’m missing something, but I’m in contract on a home now and I can clearly see leasing helped my debt to income.
The wealthy ask ''how much and will I own it at the end?' Broke average people ask 'how much a month?' I will amend that to include 'how much a month and how much will show up on my credit?'
$80k in things that go the wrong way in value paid at full retail that are only rented with a bunch of rules scares me for you.
I wouldn't mind spending $80k on cars, but they would be worth $120k because i bought patiently with cash from distressed sellers. You are taking hits 3 different ways IMO.
- Lender · Newton, MA · Member since 2018 · 1 post · 0 votes8y
Depends on how long you're planning to keep your car. If you're looking to get the latest models every 2-3 years then you should consider a lease. If you plan on keeping your car long term (7-10 years) you're better off owning. I've never leased and prefer owning my vehicles instead.
- Real Estate Agent · Santa Rosa, CA · Member since 2018 · 84 posts · 105 votes8yPurchase a used car and don’t invest much in a depreciating asset.
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes8yIt’s real simple. People make payments the majority of the time because they cannot afford what they are buying. Most investors on this website cannot afford to buy real estate with cash do they borrow the money for something they cannot afford and hope to make a profit. Leading our financing a car is the same. Drive something you can afford to pay cash with. As for paying cash for RE that is very difficult and most of us here will never be able to do.
- Lender · Los Angeles, CA · Member since 2018 · 67 posts · 35 votes8y
Always lease new cars, and always buy used cars.
- 8yKevin SantosPro MemberRealtor · Audubon, NJ · Member since 2016 · 63 posts · 30 votesCaleb Heimsoth sums it up well. All personal choice but buying out leases or fleet vehicles if you have access to that somewhere is the best financial move. Wish I had done that a few years back, bought a new Toyota Corolla a few years back, not a terrible car choice decision but almost paid off!
- Member since 2018 · 7 posts · 3 votes8y
Start with what your goals are. There's financial benefits from either depend on what you are looking to accomplish.
As someone that sold cars before, I know leases tend to bring in a decent commission compared to most new/used car sales. (Because of lack of customer negotiation on leases)
If you're goal is to drive a brand new car for 3 years, putting less than 10k/12k/or 15k miles without damaging the vehicle then go for it.
If you're goal is to simply get a lower payment with the guarantees of not having to be accountable of mechanical issues, and a luxury vehicle, consider a pre-owned/used vehicle with a great extended warranty.
If you haven't found a newer vehicle with low miles in great condition for the payment you want, then simply you need to look more or negotiate harder.
From a car salesman, and someone with a partner that has a leased vehicle (which she loves), its probably not the best idea financially under most circumstances.
- 8yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
Drive the car you can afford to purchase with cash. Unless you've already made it, a car payment of any kind will add YEARS to your need to work a 9-5. There's no way it's worth it.
- Investor · Atlanta, GA · Member since 2017 · 184 posts · 204 votes8y
Car payments are (in my strong opinion) the worst. Leases are mere constant car payments, so there's that. And to be honest a car that leases at $150-300 a month won't be anywhere what most consider "nice".
I love my car. I bought my car. However, I would not do it over again. With my mindset I have now, the money I'm using on my monthly note could easily be portioned into more valuable things for my life from family visits, to adding to my investment fund.
That being said, cars are important, so I'd go with the nicest (in your eyes), cheapest, most reliable used car you can find. You're here, so you're clearly considering some kind of REI...if done correctly, you won't have any issue getting yourself (if you still want to) a nicer, newer, "fancy" car in 10 years.
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