The average monthly lease payment in 2019 is about $450 per month for a three year lease.This is less than the $554 per month that is paid for the average new car purchase. So leasing a car is cheaper than buying, right? Wrong. Leasing costs you more than buying. In fact it can cost $1,200 more per month. Here's how...
The car salesman wants you to lease
Usually when the car salesman wants you to do something it's a terrible idea. Or more specifically, it's a good idea for them but a bad idea for you. The fact that a lease payment is less than a purchase payment for the same car should be a red flag to you. Why would the car guys offer you the same car for less per month? The reason is because they know you're now a slave to them forever with no easy way out.
You always have payments
This is the most important reason leasing costs you more than buying. When you lease you always have payments. You never pay the car off and drive around payment free while socking money into a mutual fund and making yourself wealthy. No, you continue to pay the car salesman. Forever. As soon as your lease is done, you need to go back to the dealership and lease another car. Never ending payments for you are predictable future revenues for the car dealership. You're a gold mine to them and a disaster to your personal finances.
What leasing really costs
So let's assume you're just starting out at 22 years old and you're going to start leasing. You're going to lease
an average car at $450 per month. Like all leasers, at the end of the three years you realize you own nothing and need to go back to the dealership and lease again. We will assume you do this for your whole career until you're 62, and that the lease payments increase 3% per year for inflation. We'll assume whatever money you're spending on leasing you could have invested in the stock market because you have a wealth mindset. So what does it cost?
Leasing costs you $2.8 million. Let that sink in. That's the opportunity cost of leasing instead of investing. Now of course if you hadn't leased, you would still need a car and that costs something too. Had you bought cars at $554 per month (plus 3% annual inflation), paid them off in 5 years and then kept them another three years with no payments it would cost you about $2.2 million. A savings of $579k over a 40 year period, or $1,207 per month! And this assumes you get nothing for the car at the end of that period.
What if you upgraded the car as soon as it was paid off?
If you paid off the car in 5 years and then upgraded to a new one, you would still save $949 per month assuming you could sell or trade in the car for a third of it's value after that 5 year period. So...
Buying a car instead of leasing can save you up to $579k over a 40 year period.
That's a savings of $14,479 per year.
Or $1,207 per month!
Armed with this information, my hope is that next time the car salesman tells you leasing is cheaper you explain to him that it actually costs $1,207 more per month, explain this math, and watch his eyes glaze over. And if you want to make owning a car even cheaper learn how to buy ever car you ever own in cash here.