Lie #7: Sophisticated people lease cars. Besides, it gives you a good tax advantage.
In reality, Consumer Reports and Smart Money magazine state that leasing a car is the worst possible way to get a vehicle. It's the same as rent to own. The interest rates are high, currently averaging about 14 percent, but since you are 'renting', the law states that they aren't required to show you the actual effective interest rate like when you buy a car or get a mortgage.
You know that the auto or loan companies are not going to lose money on the deal. Ever wonder how they figure the lease payments? Say you lease a car worth $24,000 new and when you turn it in three years later, it is worth $12,000. The lease payment is designed to cover that amount of loss ($12,000 divided by 36 months is $333 a month) plus their profit (the interest). So you have paid them the entire value of the car, plus interest, and have nothing at the end to show for it. Then there is the extra charges for going over the allotted miles and excessive wear and tear, but don't worry. If you can't afford to pay those and walk away, they are more than happy to roll those extra charges over into a new lease for another car. All you have to do is sign a couple pieces of paper and off you go with a brand new vehicle. What a deal.
Then there is the fact that since leasing is done almost exclusively on new cars, and since the greatest amount of depreciation occurs during the first year, you get to take the hit. The person who comes in to buy the lease you just turned in is getting a pretty good deal. You just paid most of his depreciation.
Smart Money magazine quoted some interesting statistics from the National Auto Dealers Association. The dealer makes an average of $82 profit when the car is purchased for cash. When the dealer sells a financing contract to a lender, they make an average of $775 profit. But when they can sell a lease to a lender, they rack up an average of $1,300 profit. Car dealerships make money from financing and the shop, not the sale of the cars themselves.
As for that tax advantage? If your accountant or tax advisor is telling you that paying a loan company $5,000 in interest a year so that you can save $1,500 on your taxes is good math, you may want to find some new advisors.
Lie #8: Getting zero percent interest on a good car is a good deal.
When you consider that you can only get that deal on a new card and a new car loses 60 percent of its value in the first four years, you are paying a lot for that new car smell. A new $28,000 car will lose $17,000 of value in the first four years. That is like opening your window and throwing out a $100 bill each week for four years.
The average millionaire drives a two-year-old car with no payments. They became millionaires because they are unwilling to pay for the type of loss that comes with buying a new car. The truth is that a good used card that is less than three years old is as reliable or more reliable than a new car. They've got all the kinks worked out of them and most were not traded because they were bad cars. Someone just wanted that new car smell.
Some people rationalize a new car for the warranty. A $17,000 loss is a pretty expensive warranty. Besides, many manufactures warranties now run five to ten years and even lifetime on some parts. You could rebuild the car a couple of times for the extra value you are losing buying a new car.