To lease or to buy?
Phil Reed of Edmunds.com.
Tess Vigeland: Alright, let's check the odometer. We're about halfway to Pasadena in the car I purchased five years ago. I never considered leasing -- always thought it was a bad financial move. But that's not necessarily true, as our driving buddy Phil Reed of Edmunds.com explained.
Phil Reed: Some people just absolutely love leasing, and other people think it's nothing more than a scam.
Reed: And it's neither. It's just another way to finance a car. What's really good about leasing is that if you have a high priority -- so in other words, what you want to spend your money on is cars -- it's a good way to be in a new car every two to three years. It makes that transaction very easy, you move from car-to-car. And you become what we call a "serial leaser." But if you do this through your adult life, you'll wind up paying more in your automotive budget than you would if you bought new or if you bought used.
Vigeland: And you're never gonna own it. I mean, you're sinking money into something that you're never gonna outright own.
Reed: That's true. You don't own the car. You're basically just paying for the depreciation on a monthly basis. However, there is a pretty good tax write-off for it, if you use your car for business. So a lot of accountants will actually tell their clients, "We want you to lease." And you do have the option to buy the car at the end of the lease if you fall in love with it and you really like it. But you shouldn't do that with the intention of buying, because you'll probably lose a little bit of money in the transaction.
Vigeland: OK, so if you're going to lease, just lease.
Reed: Yes. The whole concept of leasing is to maximize your cash flow, so all you do is you make a small down payment, smaller monthly payments and you're driving a great car. One of the things about leasing, they always say, is you can drive more car for the money. Because the really good cars hold their value well and the lease payment is lower.
Vigeland: What about how much money you should put down on a lease? I always find that terribly confusing.
Reed: You should really put down about $1,000 and those are just the start-up fees. Because if you put down a large one with the intention of reducing your monthly payment, first of all, it's all about cash flow, anyways, so you've just undone that. Secondly, if you wreck the car in the first couple of months, you may not ever recover that large down payment that you made. Because it pays for the current market value of the car, but not that amount of money that you just paid to start up the lease. And some of them advertise "very low lease payments," but if you look at the fine print, it's like, "Requires a $4,000 down payment." Who's going that kind of money sitting around to start a lease?
Vigeland: And we'll visit with Phil one more time later on to talk about the end of your relationship with your car.