Deciding On Leasing Or Purchasing A New Car: Saying Good-bye To Moose!

Deciding on leasing or purchasing a new car is a big decision that can cost you money if you make the wrong one. As a car fanatic since the 1990s with dozens of cars under my belt since, let me provide some tips on how to choose.

I have both leased and purchased cars over the past three decades.

Leasing Or Purchasing A New Car Decision

After 10 years, I'm sad to say Moose is gone! He just had too many problems that cost too much to fix as a 14 year old Land Rover Discovery II. I hated to let him go because he was like my big boy.

I still remember finding him with 87,000 miles at the orphanage (Craigslist) for $10,000 in early 2005. The owner got a sweet consulting gig in Amsterdam from Pricewaterhouse Coopers and she had to sell quickly. We agreed on the steal price of $8,000 and the fun journeys to Tahoe, Napa, and Carmel began.

I actually hate driving today. There are just too many cars in San Francisco and the Bay Area now that the economy has roared back.

Traffic was very manageable just three years ago, but condos are sprouting up everywhere downtown next to main arteries, making driving very stressful. The worst is when delivery or garbage trucks double park during rush hour and traffic backs way up. Dear local politicians, please outlaw such activity.

There was a point where I almost thought about not buying a car at all, and just using UberX as it is so cheap and signing up for a ride-sharing program since prices have come down so much. But in the end, I still valued my freedom of being able to get in a car and drive anywhere whenever I wanted. 

The Decision To Lease a Car

After pondering whether to lease or purchase a new car, I ended up leasing a new car for simplicity reasons.

I went back and forth with your help between a sweet Jeep Grand Cherokee Limited for $39,700 and a Honda Fit EX for $19,025 for a couple months until the DMV forced my hand!

It was time to pay the $132 car registration renewal fee for Moose plus an $80 smog check fee if I wanted to continue. $212 isn't a lot of money every two years, but there was one other problem. I had been driving with my service engine light on my dashboard for 1.5 years! It was so annoying that I just put some black tape on the plastic cover of the dashboard to cover up the light.

When I asked the smog attendant whether he thought Moose would pass smog, he said “no” because they hook up cars to a computer diagnostic that will immediately catch the check engine light problem.

I would have to go to my mechanic, figure out how to fix the problem and then return back to the smog station once the light was off. Suddenly, the $232 in fees could very well balloon to $500+ and cause me to waste more time. Finally, I also had to buy at least one $220 M&S tire as well since my left rear tire was totally bald.

When I got to the Jeep dealer, I was all ready to get sold by the salesman. Instead, the salesman was watching the SF Giants game and didn't seem to care. I asked him to give me a deal I couldn't refuse and he said, “This is it.” So I left.

Deep down I felt that spending $44,000 after tax for another low fuel efficient car didn't feel right, even though it would have qualified as a great business tax deduction.

I went to the SF Honda dealer and there he was, a silver 2015 Honda Fit with alloy wheels and every option imaginable parked in the lot. You know that feeling you get when you see “the one”? I felt that when I saw the Fit.

Here are some of Rhino's features:

• Backup camera

• Right side view mirror camera

• 16″ alloy wheels

• Great dimensions of 160″ long, 67″ wide, 60″ tall vs. 184″ long, 75″ wide, and 75′ tall for Moose

• 6 airbags from 8 compartments vs. probably two non-operating airbags for Moose

• 130 hp from 117 hp for the previous model

• Two USB ports, 1 120V port, and 1 HDMI port

• Magic seats that can lay flat and go into the footwell

• Paddle shifters

• Bluetooth for handsfree phone calls and linking up to Pandora

• Moon roof and more

Honda Fit Felt Like Good Value

I was blown away by all the features because Moose didn't even have a working CD player. The glorious feeling of always being able to charge my phone on long road trips is amazing. The ability to park in tight spaces where parking is a premium in SF is a huge plus. A city car is perfect for a city resident.

My biggest concern was on safety given the size and weight of the Fit. Large objects tend to hold up in crashes better. Further, bigger cars tend to bully smaller cars on the road.

I was happy to research that Honda skipped the 2014 model and went straight to 2015 because they wanted to comply with all crash test metrics. The 2009-2013 models didn't pass Insurance Institute for Highway Safety's front overlap crash test. Based on the latest IIHS test, the 2015 Fit overcame the failure and received the IIHS TOP SAFETY PICK award. Awesome!

Yes, Rhino might not be as manly or as sexy as Moose. Girls also will probably not be as interested in talking to me. But I think that being more eco-friendly and frugal with one's money is pretty sexy as well.

Besides, a confident man can drive anything. I've gone from rolling in a beat up Toyota Corolla hatchback to a $80,000 Mercedes G500 back down to a compact car and I love it.

Rhino helps cover the most important aspect of Stealth Wealth since a car is the most common clue that gives people's perceived wealth away. When it comes to leasing or purchasing a new car, you can show off more with a leased car.

Making The Decision To Lease Or Purchase

Something must have happened to lease rates over the past 10 years because leasing is now a very favorable financial option based on my research with five cars across five different dealers (Honda, Toyota, BMW, Audi, Mercedes).

I used to always be opposed to a lease because the end price compared to purchase always seemed much higher. But not anymore as the premium between leasing and owning has narrowed tremendously as you'll see below.

The other reason why I decided to lease was the desire for optionality. At the end of my three year lease, I want to have the option to either purchase Rhino for $12,746 (residual value) or swap him for a new car.

Maybe I'll want a larger car due to a new addition to the family. Maybe Rhino isn't as great in the snow with chains as I hoped. Who knows. Since I recently purchased my house, it doesn't feel good to spend a boatload of money on an asset that is guaranteed to depreciate.

There once was a time when I loved negotiating with strangers online to buy and sell a car. I didn't mind waiting for hours in the DMV to register a car either. But those days are long gone.

Now I'm very willing to pay a premium for freedom and convenience. Even though I have much more free time now than 10 years ago, I have less time overall given I've got 10 years less to live.

Some of you may ask why I didn't just pay cash for the car. The main reason is due to optionality again. I don't want to feel “stuck” owning a car in case I don't like it down the road.

The Cost Of The Car Lease

* $0 down e.g. sign and drive.

* $1,000 trade-in value for Moose, a 14 year old Land Rover with 130,000 miles and $500 in work necessary for him to comply with smog. I also need a $220 new tire.

• $20,117 total cost after trade-in, taxes, and fees.

• $235 monthly lease payment vs. $604 a month purchase payment over 3 years at an interest rate of 0.9%.

• Total monthly lease payments after 3 years = $8,462.

• Residual value: $12,746 (price I can buy Rhino for after 3 years)

• $8,462 in monthly lease payments + $12,746 residual price= $21,208 compared to $20,117 after taxes, fees, and trade-in if I were to purchase in cash.

In other words, I am paying only $1,091 (5.4%) more to lease the car with the option to purchase after three years vs. if I paid $20,117 cash. The optionality is worth at least $2,000 to me and I can easily make 2.2% guaranteed income on $20,117 a year. Furthermore, I'm actively paying down my 3.375% rental property mortgage.

If I were to purchase the car, the lowest rate Honda gives is 0.9%. The cost would end up being around $20,800 to finance the car over three years, or only $392 cheaper than my total $21,208 lease cost.

A $235 a month lease payment is less than 1% of my monthly cash flow and I'm going to put it on auto-checking payment. Rhino's $21,117 all-in cost (before $1,000 trade-in) also fits into my 1/10th rule for car buying as well.

Recommendations If You Want To Lease A Car

• Drive under 12,000 miles a year. 12,000 miles is the general standard mileage allowance for leases. Every mile over 12,000 costs 25 cents on average. You can get higher mileage caps for a higher price. I drove 4,500/year on average for 10 years.

• Cherish having the optionality to turn back the car after three years.

• Enjoy driving new vehicles.

• Lease an electric vehicle because its battery life might fade. Further, batteries cost $6,000 on average to replace.

• Don't have a trustworthy auto-mechanic to fix cars off warranty. My auto-mechanic of 10 years left SF due to high rents and moved to Oakland.

• Unsure about your future driving needs due to family size, job, etc.

• Want to maximize monthly cash flow.

•  Don't like negotiating deals when it comes time to sell.

When you're thinking about leasing or purchasing a new car, you always want to think about the after-tax cost of owing the car as well. If you have a business, you can easily deduct the car lease.

Here is a post I wrote on how to get out of a car lease if you find yourself stuck.

Leasing Or Purchasing Is A Strategic Decision

Owning a car is generally bad for your finances. Besides the purchase price of the car, there's the recurring maintenance costs, parking tickets, moving violation tickets, DMV renewal fees, accident costs, and insurance. Everything adds up.

I totally forgot about my car insurance costs by buying a new car. Moose only had liability coverage that cost $286 every six months. I now pay $456 every six months for Rhino because it is mandatory I get comprehensive and collision insurance when leasing a new car.

That's a whopping 59% increase in my insurance costs that I forgot to calculate! I'm not going to starve paying $340 more in insurance every year, but that's an unfortunate expense.

The best way to minimize your car ownership costs is to hold onto your vehicle for as long as possible, buy a car that has a history of reliability, keep up with the scheduled maintenance, shop around for insurance, and be a good driver. Please follow my 1/10th rule for car buying as well.

Always think about your car as an ongoing liability. And if you have a car newer than 10 years, then maybe it might one day turn into a business expense if you decide to drive for Uber or deliver pizzas.

Leasing or purchasing a new car can work well either way. Just make sure you follow my recommendations before leasing or purchasing. If you do, you'll be able to comfortable afford your car and enjoy it too.

Related posts:

The Best Time Of The Year To Buy A Car

The Best Mid-Life Crisis Cars To Buy

Recommendations For Car Drivers

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Updated for 2021 and beyond. Leasing or purchasing a new car is a Financial Samurai original post. I ended up paying cash for a Range Rover HSE because I plan to drive it for 10 years.

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