When you want buy a car and you want it soon, without having to wait to put together the down payment that a loan might require, and of course, you also don’t want to wait to put together all the money to pay for the car in cash, then leasing or renting could seem like a good option for you.
In this article, we are going to see what the benefits and disadvantages of leasing are, and we are going to compare it with other ways of buy a car to know which one is best for you.
What Is Leasing Or Rental?
Leasing or renting is a way to rent a car in the long term. One of its main advantages is that the initial disbursement can be less than what a loan would ask of us, and cannot even be compared to paying for the buy a car in cash.
Another of its advantages is that we could constantly be changing cars for a newer one, which could be seen as a good option.
However, leasing a car is much more like leasing a car long-term than owning it, and that could be a not-so-positive aspect. For example, you have a limit of kilometers available to travel per year, with penalties if you do not comply.
Lease VS Credit Comparison
Let’s imagine that we want to buy a car 2023 Nissan Sentra, a car that costs $402,900 outright.
If we want to lease it we will find two options: financial leasing and pure leasing:
- Financial lease: In this case you would have to pay $33,500 initially plus $11,000 monthly for 36 months, giving a total of $429,500. In this type of lease, in the end, you do not keep the car, you would exchange it for a newer one and pay that $11,000 a month or more again… and so on.
- Pure lease: For this option, you would have to make an initial payment of $38,000 and the monthly payment would be $12,800 for 36 months. But also, in the end, you will have to make a payment of $150,000 to keep the car… This gives a total of $648,800!
In both options (especially in pure leasing) we can realize that we will end up paying more than what the car costs. That already makes us see that it is not an excellent option.
But of course, the initial outlay is less than paying in cash and even less than paying on credit.
Credit: In a real example, to get this car on credit you would have to pay $80,580 down payment and $11,500 monthly for 36 months. This would give a total of $494,580… and you do keep the car. But of course, those are interests, why give money to the bank?
- If you buy cash you pay $402,900 and you keep the car
- With a financial lease, you pay $26,600 more and you don’t keep the car
- When paying with credit it would be $91,680 more, but you keep the car
- And with a pure lease, you would pay $245,900 more than cash and you keep the car… thank goodness.
This reminds me of a quote from the author of The Simple Path to Wealth, where he says that buy a car with credit (or leasing it) is like saying, “I want that car but I don’t want to pay $400,000 for it, I want to pay much, much more.”
As we already saw in the examples, that is true, and it is completely irrational, the cost of impatience is very expensive.
Read This Article: 5 Financial Rules To Improve Your Finances
The Best Way To Buy A Car
What should we do then if we want to buy a car? We have already seen that renting is more expensive and with the interest on a loan we are giving money to the bank.
Well… Save! Save the money we need for a certain period until we can finally buy the car.
What I did to buy my first car was establish that priority. By seeing how much money I earned and how much I spent, I was able to budget an amount that I was going to save each month for the vehicle. It took almost 2 years until I collected enough and was able to make the purchase.
In my store at Eduardorosas, you can find a template that will help you achieve your savings goals considering inflation, and you can purchase it for only MXN 29.
Once you raise the money, also consider that preferably you should not buy a car, since it loses a good amount of its value as soon as it leaves the dealership. As soon as your car puts a tire outside the dealership, it is worth 15-25% less than a few minutes before.
To get the most value for your money you should buy a used car.
- Look for a car that is about 5 years old. It is a good point to find cars that do not cause many problems, even relatively new, and for much more affordable prices.
- You can also research the most reliable brands for the type of car you are looking for (In general, Japanese brands are the most reliable: Toyota, Honda, and Mazda… and curiously, brands that we might think are high quality such as Mercedes, BMW or Audi, they tend to have more problems as pre-owned cars)
A Car Is A Luxury
You have to understand that a car is a luxury, even if we say it is a necessity. Yes, we can say that it is to save more time, that it makes our lives easier, or that you need it to go to work, but at the end of the day many people cannot afford a car. If we can it is a luxury.
And it is not only a luxury, it is a liability. A car is not going to make you more money, it is going to be taking it away from you.
Common Arguments In Favor Of Leasing
Probably while you were reading all of the above, at some point one of the arguments mentioned in favor of leasing came to mind. For example, that you are not going to lose capital or that you can deduct taxes.
And well, it’s true, when you buy a car with a lease you don’t lose capital. You don’t need to raise such a large amount to put down a loan or pay cash for the car… but you are making a purchase! You are going to become decapitalized. If you don’t want to decapitalize, don’t buy.
If that purchase destabilizes your finances, it is because it is not a good time to do it. If your excuse for using a lease is “I don’t want to lose capital” it is a sign that you cannot afford to buy a car.
On the other hand, it is also widely commented that monthly payments are deductible. A natural person with a business activity or a company tells the treasury that he is spending on this, so in the end, he will have to pay less taxes.
According to article 28 of the LISR, you can deduct up to $73,000 per year for internal combustion vehicles and up to $104,025 for hybrid, electric, or hydrogen vehicles.
However, this argument is terrible. Spending $100 to save $5 doesn’t mean I saved $5… it means I spent $95.
In Mexico, the highest tax we could pay is 35%. For this, we would have to earn more than $4,500,000 annually.
Assuming that we earn $5,000,000 and therefore have the highest tax rate when purchasing our 2023 Sentra (the example we gave above), we could deduct $73,000 as it is an internal combustion vehicle.
In the end, we would “save” $25,500 in taxes, but we had to shell out $132,000 during the year. This is not a savings, just a slightly smaller expense. And this is maximizing the profit at the rate of 35%.
In addition, you could also deduct if you pay for your car in cash. Up to $150,000 for internal combustion cars, $250,000 for electric, hybrid, or hydrogen cars, and 100% for pick-up trucks.
For Whom Leasing A Car Might Be A Good Option
The only ones that may make sense to do financial leasing are companies that have fleets of cars that must be constantly changing.
But for individuals, it does not make sense, the best way to buy a car is by saving, keeping that money in something very safe but that helps maintain the value of money against inflation (like CETES), and paying cash for a pre-owned car. 3-6 years old.