Why Leasing is a Giant Rip-Off (and When it's Not)

I just received an ad from a local car dealer that offered a “great” lease deal. Out of curiosity I thought I would look at the terms. And to tell the truth I got a little upset because I’m afraid some of you might actually fall for this garbage. I won’t tell you which brand vehicle this was for (because they all pull the same nonsense). But this brand new vehicle has a Manufacturer’s Suggested Retail Price (MSRP) of $25,045.00. Car leasing is one of the biggest rip-offs around so lets just take a look at one ad and see some of the leasing “gotchas” hidden in there.

36 Month Lease Only $244.64

The large print looks pretty enticing only $244.64 a month for 36 months. That sounds pretty good for a brand new car! Remember the old late-night infomercials where they would say, “But Wait, there’s more” and then throw in another deal sweetener? Well, in this case the “Wait, there’s more” isn’t a deal sweetener but another “gotcha”.

Leasing Rip-off Gotcha #1

Reading the “fine print” the first line says, $3,756 down payment required. Oh, wait, it’s not just $244.64 you have to give them a lump up front. and you must finance through their finance company. OK so that part is reasonable.

Leasing Rip-off Gotcha #1.5

The next line says $4,000.64 due at signing. Wait, I thought it was a $3,756 down payment? Oh, in addition to the down-payment you also have to pay the first month’s lease.

Leasing Rip-off Gotcha #2

The next line says, “Does not include tax, tag, processing and $999 dealer fee.” What??? I understand the the tag fee that goes to the state, but… They’re going to tag on another $1000 plus who knows how much for processing and tax? But they are going to be generous… no security deposit required!

Leasing Rip-off Gotcha #3

It says the “Total Capital Cost” to rent this vehicle for 3 years is $21,289… but wait the total MSRP value of the car was only $25,045.00 or only $3,756 more than what you are paying to rent it. I’ll bet with a bit of negotiating you could buy the car outright for $21,289. and get to keep it after the 3 years and drive it for another 10 years for free!

Leasing Rip-off Gotcha #4

But wait, there’s more… Dealer installed accessories are extra! Yep, the dealer can tack on a whole bunch of extra junk like a quick spray of “fabric protector” and tack on hundreds of more dollars! And remember that for “in stock units only”, i.e., you’re stuck with anything the dealer has “already” installed.

Leasing Rip-off Gotcha #5

But that’s not all… there’s even more! Yes, friends they’ve come up with one more way to get you. When you turn in the vehicle they are going to charge you an extra 15? per mile for every mile over 12,000 miles per year. Who only drives 12,000 miles a year? According to Car and Driver the average American drives 13,476 miles a year. California residents drive an average of 14,435 miles, Indiana residents drive an average of 17,821 miles and Georgia residents drive an average of 18,920 miles per year.

So, if after the three years, you’re average and you’ve driven 40,428 miles instead of the allowed 36,000 miles you will owe them an additional 4,428 x 15? = $664.20. But if you are the average Wyoming resident and drive 21,821 miles a year, you will have an excess of 29,463 miles x 15? =$4,419.45 and you will have paid more to lease the vehicle for three years than it would have cost you to buy it and you get zero trade-in value.

When it Pays to Lease

I promised you I’d tell you when a lease is beneficial. And unfortunately it is only in very limited circumstances. And even worse it generally only applies to corporations. Yes, it may pay for companies to lease vehicles rather than buy them. And this is primarily because of the tax laws. You see, if a company buys the car they can’t write off the full cost as an expense the first year (even though they actually spent the money). Instead, they have to “depreciate” the vehicle. The general idea behind car depreciation for taxes is to spread the cost of a car out over its “useful life,” instead of writing off its whole cost the year you buy it. The IRS generally considers the “useful life” of a car to be five years. So, a company that spends $25,000 for a car can write off 1/5th of it in the first year. (Although there are some other depreciation methods that will let you write it off a bit faster). But 1/5th of $25,000 is $5000, so the company gets to reduce their income by $5,000 the first year. But if they lease the car they get to write off the $3,756 down payment, plus the tax, tag, processing and $999 dealer fee, and the ($244.64 x 12 =$2,935.68) for at least an $8,000. write off. Plus they don’t have to worry about maintenance and at the end of the term they just drop the vehicles off and start all over.

But for us common people without money to burn, it is just a bad deal all around.