At Home Mechanic

A purchase is pretty straightforward; you and the dealer agree to a price, you either pony up the cash for the full purchase price or you finance the purchase with some sort of loan. Once the car is purchased for cash or the loan has been paid off, you own it. Or rather you own the residual value of the car known as equity. Because as we all know, a new car loses about 30% of its value as it leaves the dealer’s lot. And cars continue to lose value as time moves on. In EXTREMELY rare circumstances a car can actually appreciate in value, but this only occurs in the world of hand built Ferraris or similar limited production cars. This is such a rare and unusual event that we can safely assume that this will never happen to a car that the average guy can afford.

Yes some old and rare cars can appreciate as time passes. Old cars can evoke strong emotions in people with more disposable income than brains. Back during the Dot Com boom of the late 1990’s, with money flowing like water on Wall Street and in Silicon Valley, collector car prices went through the roof as the newly wealthy geeks and traders sought to buy up the dream cars of their youth. But as the Internet bubble burst, the demand for and prices of specialty cars declined. The current bubble in Real Estate prices fueled by relatively low interest rates has put a lot of money back into the pocket of car collectors who feel that it is never too late to have a happy childhood. But unless you are willing to buy a Corvette Z06 and then never drive it for 20-30 years, a new car purchase is doomed to be a net money loser for you. That loss of money is also known as depreciation and that is a standard feature on every new car sold around the world. Even if your purchased car loses 90% of its purchase price over the time you own the car, you still own the 10% residual value of the car… and you get to keep the car.

A car lease is not a car purchase. But it is not a mere rental either. With a lease you lay out little or no money to start the agreement and your payments can be far less than a loan payment. That sounds pretty good, but what is the catch? The catch is that at the end of the lease you have no equity in the car you have been paying to use. And you have to give the car back

So is a lease a glorified rental agreement? No, because with a lease you are buying something, but it is not a very tangible commodity. A lease is actually the purchase of the depreciation of the car you have been using. The more your car depreciates the greater your lease payments will be. If you have the opportunity to lease a $30,000 Mercedes or a $30,000 Chrysler, it can be reliably predicted that the Mercedes will lose less of its value during the length of the lease and the lease payments will be lower on the German car. And the leasing company wants you to return their car in good condition so a lease comes with come clauses that stiffly penalizes excess mileage and less than adequate maintenance. So you get to use the car, but you better not drive it too far and you had better keep up with all the repairs or the leasing company can charge you a lot of extra money when you turn in the car at the end of the lease.

The big advantage of a lease is that self-employed people and people who use their car for business can usually deduct the cost of a lease from their income tax. Those same people can usually deduct the purchase of a car also, but the purchase price will be amortized over a depreciation schedule set by the Federal Government. Us folks who punch a clock at the behest of an employer are hard presses to find a legitimate way to deduct the cost of a lease and there is no deduction on the interest on a car loan any more (Ronald Reagan’s administration lowered the tax rates for most Americans but also reduced the number of expenses that could be deducted, including the interest on any kind of loan). The tax dodge for most home owning tax payers is to refinance their home and use any resulting cash to buy a car while deducting the new home loan interest.

The most reliable financial “smart move” in automobile ownership is to allow someone else to absorb the first year depreciation hit of a new car by buying a 1 or 2 year old used car that holds its value well like a Mercedes. Drive that slightly used car for a year or so and then sell it for nearly what you paid for it. You have the advantage of driving a different car every year and avoid the financial pitfalls of new car depreciation and the lease company’s restrictive clauses.