RPF0419-Why_Car_Leasing_is_Expensive_and_Cheap
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00:00:29.800 | Today on Radical Personal Finance, we talk about car leasing.
00:00:36.880 | Some people think that leasing a car is a very expensive way to operate a vehicle.
00:00:40.960 | Some people think that leasing a car is a very inexpensive way to operate a vehicle.
00:00:44.320 | And today I explain to you why they're both right.
00:00:50.040 | And also, who is leasing the best for?
00:00:53.240 | And then perhaps most importantly, if you're in a lease and you're trying to get out of
00:00:57.200 | the lease, how do you do that in an intelligent way?
00:01:00.840 | What are your options?
00:01:18.560 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:01:22.200 | skills, background, education, and daily encouragement that you need to live a rich and meaningful
00:01:27.440 | life now while working on your plan for financial freedom in 10 years or less.
00:01:31.680 | My name is Joshua Sheets and I'm your host.
00:01:33.940 | This will be a fun one.
00:01:34.940 | I'm going to explain to you car leasing in a very factual and straightforward way.
00:01:38.480 | And I think after this show, you'll be able to understand which decision would be right
00:01:42.520 | for you.
00:01:46.520 | If you want to get personal finance people hot under the collar, just bring up the subject
00:01:54.120 | of car leasing and start arguing about it.
00:01:56.000 | It seems like it's one of those things that's an elementary doctrine in the world of personal
00:02:02.040 | finance that people feel very strongly about.
00:02:05.080 | But today I haven't really talked much about it on the show.
00:02:07.800 | And so it's time to tackle the subject with a clear and straightforward explanation of
00:02:11.960 | it.
00:02:12.960 | And then again, as I said, all those options.
00:02:15.160 | Before we do that, I want to mention one thing and then also thank many of you for something
00:02:22.240 | very important.
00:02:23.240 | Sponsor of the day today, number one, is Joshua Sheets, your host, indeed me.
00:02:29.840 | And specifically what I want to make you aware of is the fact that – are you aware that
00:02:34.920 | if you'd like to do a phone consulting call with me, that I offer that service?
00:02:38.920 | I guess I'm not very good at advertising that because I get emails from time to time,
00:02:41.720 | people saying, "Joshua, I didn't realize you were doing that."
00:02:43.960 | So stay right up front.
00:02:45.480 | If you would like to talk to me privately, personally about your specific situation,
00:02:50.160 | you can book a phone call with me.
00:02:51.920 | The way that works is you go to RadicalPersonalFinance.com/phonecall.
00:02:55.400 | That will forward you through to a website that I use to manage those transactions.
00:02:59.280 | It's a website called Clarity.
00:03:01.720 | You'll book a call with me.
00:03:02.720 | We'll go back and forth and schedule it.
00:03:04.840 | And the way the actual transaction will work, it's super simple.
00:03:08.880 | On the site, you'll be able to book time with me.
00:03:11.400 | You can select that call.
00:03:12.800 | You'll put in your credit card information and you'll guess how long that you – you'll
00:03:17.960 | guess how long you're going to spend speaking to me.
00:03:19.920 | Let's say that you're going to speak to me at 30 minutes.
00:03:22.080 | My current billable rate is $300 an hour.
00:03:24.880 | So if you do 30 minutes, your card will be charged for $150.
00:03:27.640 | Then you'll be provided at the time of the call with a custom conference line.
00:03:31.900 | We both get a custom conference line.
00:03:34.080 | Once we dial into the call, the computer starts counting the minutes.
00:03:37.020 | If our call is shorter than the 30 minutes that you guessed it would take, you'll wind
00:03:41.360 | up with a refund.
00:03:42.360 | If it's longer, you'll be charged more.
00:03:44.040 | So it's a really great, really simple system.
00:03:46.600 | The technology has worked flawlessly for me.
00:03:49.560 | But that's – I've done dozens and dozens of these calls.
00:03:52.200 | Go by RadicalPersonalFinance.com/phonecall.
00:03:54.740 | Check out the reviews.
00:03:55.740 | Many, many people have been very satisfied.
00:03:57.520 | We've talked about all kinds of issues in a consulting basis.
00:04:00.200 | We've talked about leasing versus buying.
00:04:02.120 | We've talked about what type of car to buy.
00:04:04.200 | I've had 100 percent satisfaction thus far.
00:04:07.560 | We've come up with some really good solutions for people in a private format.
00:04:12.200 | So if you'd like to talk to me about your personal situation, book a phone call with
00:04:15.480 | me at RadicalPersonalFinance.com/phonecall.
00:04:18.680 | Secondly today, I want to thank those of you who are supporting the show as patrons.
00:04:23.080 | About 300, just under 300 of you support the show as patrons and there have been a few
00:04:26.240 | more over the weekend.
00:04:27.240 | I just want to say thank you for that.
00:04:28.960 | That is hugely important.
00:04:31.280 | The patron program is a program that allows you to simply say, "Joshua, I appreciate
00:04:35.720 | what you're doing.
00:04:36.720 | I want to send you some money.
00:04:39.160 | I believe that a worker is worthy of his wages and I also believe that a worker should always
00:04:43.320 | work before receiving his wages."
00:04:45.880 | And so that's basically the way that I approach the show here.
00:04:48.120 | I try to provide this for you.
00:04:49.920 | I try to give you as much information as I'm able to do it.
00:04:52.480 | I do it to the very best of my ability to give you useful information and I do it all
00:04:57.440 | for free.
00:04:58.440 | It shows up for you as free and the podcast, the free format, is my primary focus.
00:05:03.960 | Now if you value that and you'd like to say, "Hey, let's voluntarily engage in a transaction
00:05:08.480 | together," you can take some percentage of what I've saved you or what I've helped you
00:05:12.600 | and send it to me as a patron.
00:05:14.240 | You could do as little as a buck a month, five bucks a month, ten bucks a month.
00:05:17.200 | Some people do 20, 30, 50, any number that you choose.
00:05:21.120 | You can do that at RadicalPersonalFinance.com/patron.
00:05:24.560 | Thank you very much for your patronage.
00:05:26.960 | Now leasing.
00:05:29.040 | I personally am of the opinion that there's nothing inherently wrong with leasing.
00:05:32.760 | I get really frustrated when people use personal finance advice and they make what is subjectively
00:05:40.320 | true objectively true.
00:05:43.960 | I get annoyed when people try to say, "Well, this is what you always do," when it's something
00:05:50.120 | that is clearly relative to the person.
00:05:53.560 | I'm convinced there are many things in life that are absolutely objectively true.
00:05:59.160 | Truth is not relative.
00:06:01.040 | But most personal finance decisions are not absolutely objectively true.
00:06:05.520 | That's why I steer away from things like never lease a car or always lease a car.
00:06:09.720 | Rather, I look at it and say, "Let's dig it out a little bit and let's talk about why."
00:06:16.000 | Now with regard to car leasing, there's a paradox.
00:06:18.800 | The paradox is this.
00:06:20.800 | Leasing a car is the most expensive way to operate a vehicle.
00:06:28.760 | Leasing a car is the cheapest way to operate a vehicle.
00:06:33.600 | Both of those things are true depending on your perspective.
00:06:37.760 | Let me expand.
00:06:39.780 | If you are going to drive a car and own a car and you're going to continually drive
00:06:43.200 | and own a car over a very long period of time, leasing a car and swapping out your leased
00:06:48.280 | car every three years or whenever your lease comes up will be the most expensive way for
00:06:53.200 | you to operate a vehicle.
00:06:56.520 | However, if you're comparing going and buying a new car versus going and leasing a new car,
00:07:04.840 | your monthly payment for the lease will be substantially less than your monthly payment
00:07:11.360 | to purchase the car.
00:07:15.600 | These are both true for exactly the same reason.
00:07:19.360 | When people are looking at leasing, it's important to understand are they trying to operate a
00:07:25.560 | vehicle at the lowest cost over their lifetime or are they trying to operate a vehicle at
00:07:31.960 | the lowest monthly cost for a temporary period of time?
00:07:38.720 | Now obviously, in general, to build wealth, you should be concerned with lifetime costs.
00:07:45.880 | So therefore, generally, I would advise against leasing.
00:07:50.920 | But there are times and situations in which somebody has to be concerned with monthly
00:07:55.520 | cost and in these cases, leasing might be an ideal solution.
00:08:01.840 | I want to explain to you two basic concepts here about leasing.
00:08:05.680 | First, I want to talk about depreciation as a concept and then I want to explain to you
00:08:10.680 | how leasing actually works under the terms of the contract.
00:08:16.620 | Then we'll talk about the differences.
00:08:20.040 | Depreciation is a word that I use a lot here on Radical Personal Finance.
00:08:23.160 | All it means is the steady loss of value over time.
00:08:28.840 | In the car world, this is simple to see.
00:08:30.720 | If I put a brand new car next to a car that's three years old and I ask you to pay the same
00:08:40.280 | price for both of them, you'd be a fool if you took the car that was three years old.
00:08:48.140 | Same car, same price, you'd choose the new one for its inherent characteristics.
00:08:55.880 | Those characteristics may be things like, "Hey, it's mechanically sound because it's
00:08:58.880 | brand new."
00:08:59.880 | It may be things like, "It smells good," or, "It's shiny."
00:09:02.320 | It doesn't matter.
00:09:03.320 | The point is you'd always take the new one.
00:09:06.600 | If I put those cars on an open market, which is what we have in a car marketplace, you're
00:09:13.440 | going to pay less for the one that's been used.
00:09:16.600 | Many people neglect to look at the severity of depreciation on cars.
00:09:26.720 | It's really substantial.
00:09:28.080 | We often talk about 15% a year, but it's important that you recognize that 15% a year is not
00:09:33.760 | constant.
00:09:34.760 | It depends on the car.
00:09:35.760 | Some cars depreciate more quickly.
00:09:38.040 | Some cars depreciate more slowly.
00:09:40.400 | I pulled up here in preparation for this show just some data, and I found this neat infographic
00:09:45.080 | from Edmunds that I'll link to in the blog post for today's show at RadicalPersonalFinance.com
00:09:49.600 | or in the notes page right up there on your mobile phone, which is how most of you are
00:09:53.480 | listening to me.
00:09:57.200 | On this Edmunds page, it says that during the first five years, a car depreciates by
00:10:01.040 | 15% to 25% each year.
00:10:05.120 | Let's talk about what that actually means in numbers.
00:10:07.920 | In this infographic, Edmunds is from 2010.
00:10:12.480 | Edmunds uses the idea of a brand new Nissan 370Z.
00:10:17.720 | The sticker price on that car that you would actually pay at the dealership, the true market
00:10:22.400 | value under their calculations, their data, was $29,873.
00:10:27.760 | Let's call that $30,000 among friends who are trying to track numbers while they drive
00:10:31.280 | down the road.
00:10:32.280 | $30,000 car.
00:10:33.280 | That is the actual true market value that you would pay for that brand new Nissan 370Z.
00:10:42.240 | The first depreciation that you experience is the first minute that you drive it off
00:10:47.860 | the lot.
00:10:49.440 | As soon as you buy the car and leave the car dealership, the car goes down in value immediately.
00:10:57.820 | In this case, the Edmunds data indicates that the car goes down in value by $2,500.
00:11:05.740 | $2,500 in the first minute after you drive it off the lot.
00:11:13.540 | You lose about 11% of the car's value the moment you drive it off the lot.
00:11:18.860 | If you're ever buying a new car, enjoy that first minute because it's a very expensive
00:11:24.380 | minute in the new car.
00:11:26.500 | That means that your $30,000 car is now worth $27,000.
00:11:31.940 | Now that immediate decrease in value is just simply due to the fact that the car is no
00:11:36.540 | longer new and it's no longer going to come from the new car dealership under all the
00:11:41.820 | terms of the new car.
00:11:44.220 | That's unavoidable.
00:11:45.460 | There's an immediate depreciation there.
00:11:48.620 | In the first year, you have the highest amount of depreciation.
00:11:54.140 | This is largely because the car is still so close to new that when somebody's considering
00:11:59.620 | buying a one-year-old car or a brand new car, they're probably going to be swayed over in
00:12:04.500 | the direction of the brand new car because the prices are going to be very similar.
00:12:08.740 | But it's also due to the fact that in that first year, the car is worth the highest amount.
00:12:13.460 | It drops percentage-wise substantially.
00:12:17.060 | The Edmunds data indicates that at the end of one year of ownership, your car has depreciated
00:12:22.260 | in value by $5,600.
00:12:26.300 | So it's gone from being worth $30,000 to $24,000.
00:12:32.420 | If you add up that in here, that's down $6,000.
00:12:39.740 | So at the end of one year, you've lost $6,000 of value.
00:12:44.180 | In the second year, you lose another $3,600 of value.
00:12:49.380 | If you own your $30,000 car for two years and you go and sell it, you can sell it for
00:12:53.980 | $20,000.
00:12:56.180 | You've lost 10 grand in the first two years.
00:12:59.100 | And then it continues from there.
00:13:00.180 | In three years, in the third year, your car depreciates by $3,100.
00:13:05.220 | Now let me just read you these numbers here so you can understand how depreciation works.
00:13:09.900 | In the first year, you lose $5,600 of value.
00:13:13.380 | In the second year, you lose $3,600 of value.
00:13:18.140 | In the third year, you lose $3,100 of value.
00:13:22.540 | In the fourth year, you lose $2,800 of value.
00:13:26.660 | And in the fifth year, you lose $2,500 of value.
00:13:31.080 | After five years, your car has gone from being worth $30,000, which is what you paid for
00:13:36.500 | it, to being worth $12,000.
00:13:40.140 | You've lost 60% of the value in the first five years.
00:13:44.320 | And this is normal no matter what kind of car.
00:13:46.620 | Some cars depreciate a little bit less.
00:13:48.780 | Some cars depreciate a lot more.
00:13:50.940 | But this is a good average to look at.
00:13:55.900 | That's a very important concept for you to grasp.
00:14:02.300 | It's important to recognize that as you drive the car, as this car sits there, in addition
00:14:05.820 | to all of its normal costs, it's going down in value.
00:14:11.020 | Now let's bring this back to leasing.
00:14:12.500 | How does leasing fundamentally work?
00:14:15.220 | Well, let's pretend that you were going to lease a car from me.
00:14:18.580 | The first thing that I have to do is go and buy the $30,000 car.
00:14:23.340 | So I go and take my $30,000 and I bring it to you.
00:14:26.580 | Excuse me, I go and take my $30,000 and I buy the car.
00:14:29.860 | Now you say, "Joshua, I want to rent the car from you for..."
00:14:35.820 | Let's stick with my math because I just did this five years.
00:14:38.260 | I want to rent the car from you for five years.
00:14:41.340 | Pretend you were going to do a five-year lease.
00:14:42.760 | Most leases are shorter in term than five years, but for the sake of my illustration,
00:14:46.780 | let's stick with five years.
00:14:47.780 | Joshua, I'm going to rent the car from you for five years.
00:14:51.180 | Well, in this context, I know that at the end of five years, the car is going to be
00:14:56.820 | worth $12,000.
00:15:01.380 | So in order to figure out how much to charge you, I know that I'm going to buy the car
00:15:06.540 | for 30 and I'm going to sell it in five years for 12, so I know I need to get $18,000 from
00:15:11.520 | you at least.
00:15:13.020 | So I could take $18,000, divide that by 60 months and I could charge you $300 a month.
00:15:22.060 | I also, however, need to recognize the fact that I'm losing the use of my money and I'm
00:15:26.820 | a businessman, so I need to make sure that I'm getting a return on my money.
00:15:32.140 | So I take an interest rate.
00:15:33.860 | I decide how much I'm going to charge for this, for the loss of the use of my money,
00:15:40.420 | and I add that to the $300.
00:15:45.300 | Those two things put together form the basis of our lease contract.
00:15:52.580 | The technical term would be the principle and the interest on the depreciation.
00:15:58.400 | That's the technical term for the actual transaction.
00:16:03.020 | But then I've also got to recognize the fact that I'm out the additional $12,000, so then
00:16:07.500 | you had on the interest and the residual value.
00:16:11.940 | How much interest am I going to earn from my $12,000?
00:16:15.180 | And then of course you would add in local sales tax and there's some additional costs
00:16:18.740 | as well, some fees such as an acquisition fee or a disposition fee at the end of the
00:16:22.980 | lease.
00:16:24.940 | Now these things put together total the lease payment.
00:16:31.700 | The reason leases are cheaper than buying a car is you never actually pay for the full
00:16:39.500 | price of the car under a lease.
00:16:42.980 | You only pay for the cost of the depreciation.
00:16:47.060 | Thus if we were to do a five-year lease on this car or if you were to do a five-year
00:16:52.260 | purchase plan, you would be paying a higher price per month on the five-year purchase
00:16:58.100 | plan because each month you have to make up a little bit more to cover that residual value.
00:17:05.820 | You're only getting charged $20,000 under the lease whereas you're going to pay the
00:17:11.020 | full $30,000 under the purchase plan.
00:17:14.860 | That's why leasing cars is cheaper on a monthly basis.
00:17:21.060 | The reason it's more expensive to lease a car though on the long term is that at the
00:17:26.820 | end of the lease you don't own anything.
00:17:29.540 | You can't keep driving the car.
00:17:32.940 | Now back to the depreciation cost.
00:17:35.340 | The major problem with leasing is that you're always buying brand – you're always leasing
00:17:41.140 | brand new cars and you're paying for the depreciation when that payment is the highest,
00:17:47.900 | when that depreciation cost is the highest.
00:17:50.580 | For in the example here, on the first year, the car goes down in value by $5,600 in the
00:17:57.940 | first year.
00:17:59.260 | That's a huge cost, $5,600 of depreciation in the first year.
00:18:07.460 | In the second year, it's $3,600.
00:18:11.300 | So all of your depreciation is front-loaded.
00:18:13.840 | When you're leasing a car, you're operating a vehicle under the most expensive terms.
00:18:20.180 | Every time you re-up your lease and go lease another one, you're constantly taking that
00:18:24.620 | depreciation at its most expensive place.
00:18:28.980 | You never get to the bottom of the depreciation curve where you own the car but it only loses,
00:18:33.900 | say, $400 of value this year.
00:18:37.900 | This is a big deal, especially in our modern world when cars are generally manufactured
00:18:43.300 | with such high quality because not only are you using the depreciation at – you're
00:18:48.300 | paying for the depreciation when it's at its most expensive, you're also going – you
00:18:54.660 | never get anywhere near the useful life of a car.
00:18:57.940 | If you lease a car, three-year lease, 12,000 miles a year, you're using the first most
00:19:03.400 | expensive 36,000 miles when a modern automobile can easily have an expected duty cycle of
00:19:10.820 | 200,000 miles without even trying.
00:19:15.380 | Maybe much longer if you want to keep it.
00:19:18.920 | So you're always operating in this very expensive place.
00:19:24.300 | That's why it's generally such a bad move to operate a car using a lease.
00:19:31.460 | Now are there people for whom leasing is really great for?
00:19:34.300 | I think so.
00:19:36.200 | The very best person for whom leasing is great is somebody who has lots of money, wants to
00:19:42.100 | always be driving a new or practically new vehicle and never wants to deal with the hassle
00:19:47.720 | of buying and selling their own vehicle.
00:19:50.700 | They just simply – the loss of value under the terms of their car lease is insignificant
00:19:55.660 | in their financial life.
00:19:57.320 | They can lose six grand in that first year or 16 grand depending on the car and it doesn't
00:20:02.540 | matter to them at all because they have so much money in other places.
00:20:06.820 | I think leasing makes a lot of sense there.
00:20:10.980 | It works well.
00:20:12.780 | I also think leasing might make sense in some circumstances where it's important for the
00:20:19.900 | image of the person, let's say the image of their business, their image as a professional,
00:20:25.060 | to be able to drive a fancy enough car to fit in in their profession when they don't
00:20:32.140 | have enough money to actually be able to afford it.
00:20:36.180 | The key is to recognize that this had better be a temporary situation.
00:20:40.540 | It's also important to recognize that most people who tell themselves that they need
00:20:44.500 | a nice car for their profession are fooling themselves.
00:20:50.740 | Image does matter.
00:20:52.620 | Presentation does matter.
00:20:53.720 | But the vast majority of people who tell themselves, "Oh, I need a nice car for my image,"
00:20:57.820 | don't.
00:20:58.980 | But there are a few people who do.
00:21:00.460 | Well, in that case, if you need the lowest monthly payment, okay.
00:21:08.740 | It can work.
00:21:10.220 | But hopefully it's temporary.
00:21:12.860 | There are a few other things.
00:21:13.940 | Hopefully you drive very small amounts.
00:21:16.180 | You need to drive less than 15,000 miles a year.
00:21:19.660 | There's possibly a small business arbitrage opportunity where if you're paying out of
00:21:24.500 | a business, perhaps you can consider the lease.
00:21:27.900 | You can speak to your tax advisor for that.
00:21:29.740 | I don't want to get into the details of that at the moment.
00:21:33.100 | But that's who leasing is good for.
00:21:37.900 | But if you're somebody who's looking to actually get the most value for your money, somebody
00:21:43.460 | who's actually looking to build wealth, in order to do that, you've got to stop stupid
00:21:49.660 | outflows of money and hemorrhaging money on depreciation on new vehicles when there's
00:21:55.580 | no practical value to them as a good place to start.
00:22:02.540 | Don't start hemorrhaging.
00:22:03.820 | Start by stopping the hemorrhaging.
00:22:06.300 | Hopefully I got that right.
00:22:09.460 | One of the simplest ways to lower the cost of transportation is to keep vehicles for
00:22:13.220 | a long time.
00:22:14.740 | And operating a car in this very high expensive bracket is a bad idea.
00:22:22.300 | It's a bad idea until you're rich.
00:22:26.180 | Here's what's the worst thing about leasing.
00:22:30.700 | Because the lease payment, saying this was the worst thing was too strong.
00:22:35.460 | Here's another bad thing about leasing.
00:22:37.860 | Because the lease payment is less than the purchase payment, it's very easy to fool yourself
00:22:42.940 | into upgrading your choice of vehicle when you're standing there in the car dealership.
00:22:49.820 | Yes, you can go and lease the Toyota Corolla for $130 a month.
00:22:55.780 | But you know what?
00:22:57.500 | If you move up to the Camry, it's only $155.
00:23:02.140 | If you move up to the 4Runner, it's only $280.
00:23:05.820 | I can afford $280.
00:23:07.160 | After all, the 4Runner is a lot better, and I might need four-wheel drive this winter.
00:23:11.700 | And you can just go marching right up from there.
00:23:14.500 | Because the lease payment is smaller, you wind up in too much car, too expensive of
00:23:19.100 | a car, where it's simply unnecessary.
00:23:26.180 | If you're interested in being wealthy, if you're interested in making good financial
00:23:29.940 | decision, if you are not yet rich, don't lease cars.
00:23:40.300 | Buy them.
00:23:42.300 | Now, in this case, if you're in that category, meaning you're interested in becoming wealthy,
00:23:47.220 | you want to make good financial decisions, and you're not yet rich, under this calculation,
00:23:52.860 | you shouldn't even be considering a new vehicle.
00:23:55.660 | You should be spending the absolute minimum to get the transportation that you need, and
00:24:01.740 | then funneling a maximum of your money into investments.
00:24:06.260 | That is an unbreakable mathematical law.
00:24:10.100 | If you're losing $5,000 per year, because you're always leasing a car at its most expensive
00:24:18.060 | point of operation, but yet you're over here funding an investment account at $5,000 a
00:24:23.900 | year, you're spinning your wheels.
00:24:32.140 | You could dramatically improve the trajectory of your wealth building if you simply stop
00:24:37.160 | the $5,000 hemorrhage and increase the investments.
00:24:43.300 | If you're not, most people aren't investing.
00:24:46.780 | If you can do both, double it up.
00:24:48.380 | Save 10 grand, you'll get financially free twice as fast.
00:24:53.980 | That's it.
00:24:54.980 | That's as simple as it gets with regard to leasing.
00:24:58.300 | Now, let's talk about how to get out of a lease.
00:25:03.660 | If you're stuck in a lease and you're trying to get out, you have very few options, and
00:25:08.940 | none of them are great.
00:25:11.240 | The first thing to recognize is that you're stuck because you moved too fast, or you wound
00:25:18.120 | up in a situation, or your circumstances may have changed.
00:25:20.420 | I don't want to be too harsh.
00:25:21.900 | There could be reasons why you did this.
00:25:23.900 | But if you want to get out of a lease, it's very difficult.
00:25:27.100 | There are a few basic options that you can do.
00:25:29.580 | Let's go from the worst to the best.
00:25:32.500 | The worst thing to do, I guess, is just to stop paying for it, in which case it'll be
00:25:36.020 | repossessed.
00:25:37.020 | Your lease will be repossessed.
00:25:38.340 | You'll be sued for the difference.
00:25:39.540 | Your credit will be affected deeply.
00:25:42.020 | That's not a good plan.
00:25:43.560 | You could do what they call a voluntary repossession, which means drive it to the lot and leave it
00:25:47.580 | there.
00:25:48.580 | In that case, the same basically thing happens where you get marked with a repossession.
00:25:55.140 | One of the things that you want to do if you find yourself in this situation is you want
00:25:58.900 | to investigate the possibility of taking the car back.
00:26:02.020 | The way that you do that is you call the leasing company and find out what the early return
00:26:06.660 | payoff amount is.
00:26:09.580 | You might be able to look and scratch around and find enough money to put with it in order
00:26:15.460 | to return the car.
00:26:19.100 | Sometimes you can maybe negotiate where they'll sell the vehicle and then you'll be able to
00:26:21.860 | put up the difference with it.
00:26:23.860 | But basically, you're trying to figure out how much money you're going to owe to get
00:26:26.940 | out of this.
00:26:29.700 | If you return the car, they'll often allow you to do that if you roll the payments over
00:26:34.900 | into a new lease.
00:26:37.180 | This is a bad thing to do if you're trying to get out of a lease.
00:26:39.740 | It's only in an emergency situation where you have a financing emergency that you would
00:26:43.260 | consider this.
00:26:44.260 | The reason it's bad because you're constantly rolling all those payments over and you're
00:26:48.780 | building up worse and worse, it's called negative equity, which means you owe way more than
00:26:53.300 | a vehicle is worth.
00:26:56.700 | Sometimes you can return the vehicle if you read your contract.
00:27:00.700 | You can always return the vehicle and pay all the penalties, but you're going to wind
00:27:05.100 | up paying a big termination fee, an early termination fee, and you're going to pay
00:27:09.260 | out the remaining depreciation of the vehicle, which you no longer have the opportunity to
00:27:12.580 | use.
00:27:13.580 | The leasing company turns around.
00:27:15.380 | They sell the car at auction and they'll reduce the money that you owe them based upon
00:27:19.540 | the money that they received at auction.
00:27:22.220 | That's a bad thing to do because the car is going to sell at auction lower than what you
00:27:29.820 | could get in the private market most likely.
00:27:32.580 | It's almost always better to try to sell the car yourself.
00:27:35.620 | This is another good option, just to simply sell the car.
00:27:40.660 | You can always buy the vehicle that you're driving from the leasing company anytime you
00:27:45.900 | want.
00:27:46.900 | Again, that's called an early buyout.
00:27:50.140 | In your leasing contract, there's a buyout at the end of the lease term, but you can
00:27:54.860 | get the number for the early buyout.
00:27:57.700 | Call the leasing company.
00:27:59.000 | Find out what the early buyout or the payoff amount is of the vehicle.
00:28:03.260 | Call the lease company directly.
00:28:06.620 | The lease company is the one that owns it, not a dealer.
00:28:08.500 | That's why I don't call the dealer.
00:28:09.980 | Just call the leasing company.
00:28:11.840 | That amount will include some fees.
00:28:13.220 | It'll have an early termination fee.
00:28:14.820 | It's usually $200 to $500.
00:28:17.500 | It'll also include in it all of the remaining depreciation cost for the lease payments that
00:28:21.620 | you haven't made so far.
00:28:23.740 | Usually, the value of the car will be less than the early payoff amount.
00:28:29.700 | So perhaps the early payoff amount is $20,000, but your car is only worth $16,000.
00:28:37.800 | So in that case, probably your best thing to do, you're going to have to figure out
00:28:42.780 | how to come up with a difference.
00:28:44.400 | If you paid a lot of money down on the car in the beginning or if this is a car that
00:28:47.960 | has a strong secondary market, perhaps the damage won't be so bad.
00:28:53.020 | You won't know until you shop the market, find out what the secondary market, find out
00:28:58.080 | what you could sell it for in the used market, and find out what the payout amount is.
00:29:01.880 | Remember, in a lease, there's always going to be a down payment.
00:29:04.800 | And if there's a down payment, not always, often there's a down payment.
00:29:09.040 | All that down payment does is it lowers the monthly payments.
00:29:12.600 | If you don't have the down payment, the monthly payments are higher.
00:29:17.160 | It's just a little accounting trick.
00:29:21.340 | So in terms of where you are right now, it will depend on how much of a down payment,
00:29:24.780 | what the actual value is of the car.
00:29:27.320 | If you can sell the car in the secondary market and come up with enough money from the sale
00:29:35.180 | and/or from your pocket to pay off the early payoff amount, you can get out of the lease.
00:29:43.220 | That's going to be one of your best options to do.
00:29:48.420 | Big challenge here in the private market is generally where you're going to be able to
00:29:51.860 | get a higher amount.
00:29:52.960 | You could also do the same thing, of course, trade it into a dealer.
00:29:55.620 | You could ask different dealers for trade-in amounts and you could use those figures as
00:29:58.980 | well, and that's good.
00:30:01.700 | At least you can go to just about any dealer and get a firm offer on a firm price, whereas
00:30:06.100 | in the secondary market, you're putting it on Craigslist, putting out ads, putting it
00:30:09.280 | on AutoTrader, et cetera.
00:30:11.620 | You don't know until the actual sale is consummated.
00:30:15.660 | One of the problems with selling these leased cars in the secondary market would be the
00:30:19.020 | age of the vehicle, which might lead to a thin market.
00:30:25.260 | If you're selling a leased car private party, you're usually selling a leased car that is
00:30:30.340 | pretty new.
00:30:31.340 | It's maybe a year old, two years old, three years old.
00:30:35.100 | Now, what's the demand for this type of vehicle?
00:30:39.780 | Most people that are shopping in the used market are probably shopping for vehicles
00:30:45.660 | that are a lower price point than one that's almost new.
00:30:48.500 | A couple of reasons.
00:30:49.740 | If you're going to go and spend, let's say you bought a car for $30,000, if you're going
00:30:54.620 | to spend $24,000 and get a car that someone else has had, or spend $30,000 for a brand
00:31:01.180 | new car, it's only a very small percentage of the population that's going to make that
00:31:06.460 | financially wise decision.
00:31:07.900 | Most people are going to say, "Let me just go ahead and buy it new."
00:31:12.940 | Not a lot of people come up with cash payments for almost new cars.
00:31:19.840 | Most people need financing.
00:31:21.800 | Of course, any buyer could arrange their own financing.
00:31:24.940 | They could arrange their own financing with their bank, but most people don't do that.
00:31:29.620 | Most people go and they get financing from the car dealership.
00:31:34.060 | The type of person that you'd like to sell the car to, there aren't many of them in that
00:31:38.600 | secondary market at that level.
00:31:42.500 | Craigslist is not crawling with people who are ready to plunk down $30,000 cash for a
00:31:48.620 | one or two year old car.
00:31:49.620 | It's a real challenge.
00:31:52.660 | The people who do have the cash to buy the car from you on Craigslist are going to want
00:31:56.660 | a deal.
00:31:57.820 | That's why they're there.
00:31:58.820 | They're smart people.
00:31:59.820 | That's who you should be, is going and buying those cars at a discount and just offering
00:32:03.420 | cash to move quickly.
00:32:04.940 | The resale market in the private market for this type of car that's a year, two years,
00:32:09.940 | three years old can be very thin, especially if you can't provide financing.
00:32:14.380 | Is it possible?
00:32:15.380 | It's possible, but the market is thin.
00:32:18.340 | It's a real challenge.
00:32:21.020 | That is a really good option.
00:32:22.340 | Sell the car and you got to get enough money from the sale of the car plus the money that
00:32:29.060 | you may have to put with it and buy the car out from the lease company.
00:32:31.920 | That will get you out under the terms of the contract and you can be out from under the
00:32:35.700 | lease.
00:32:37.260 | Finally, there is another good option that has come out.
00:32:41.940 | This is called lease trading or lease transferring.
00:32:45.860 | There are three websites, at least three.
00:32:48.660 | I'm sure there are more too, but the three websites.
00:32:51.260 | One is SwapALease.
00:32:52.900 | One is Leastrading.com and another is Leastrade.com.
00:32:57.360 | These websites exist to help people just simply swap leases.
00:33:01.140 | You get the SwapALease idea.
00:33:04.480 | These work pretty well from all of my research.
00:33:06.780 | I haven't engaged in one of these transactions personally, but I have looked at them.
00:33:10.340 | If you're looking to pick up a lease of a car or if you're looking to get out from underneath
00:33:17.220 | your own lease, you should really consider this.
00:33:21.700 | If I were stuck in that position where I said earlier, one of the places of leasing a car,
00:33:26.620 | if I were in a position where I just wanted to drive a fancy car, trade it out for a few
00:33:30.100 | years, I'd just go to the dealership and do it there.
00:33:32.420 | But if I were in that position where I had a cash flow problem and I'm trying to figure
00:33:36.500 | out how can I lease a car as cheaply as possible in order to give the transportation that I
00:33:43.300 | need, I would go to SwapALease and I would try to get it from there.
00:33:49.380 | Because here, I may be able to get into somebody else's lease at a cheaper price and still
00:33:56.440 | diminish the amount of money that I have to come out of pocket with.
00:34:00.540 | One of the big benefits of doing something on, again, a lease swapping or lease trading
00:34:05.860 | side, is that the buyer of the lease doesn't have to pay a lot of the upfront expenses
00:34:13.740 | that you, if you're selling your lease, that you had to pay.
00:34:16.740 | They don't have to pay the down payment.
00:34:20.420 | That can be a big benefit.
00:34:23.940 | So if you're looking to buy a lease, get into one, this can work really well.
00:34:28.140 | Now you, of course, need to check your contract to see if this is permitted.
00:34:32.660 | Most leasing companies will allow you to transfer the lease to another person.
00:34:36.940 | You have to be careful because in many cases or most cases, you're still going to be on
00:34:41.020 | the contract and liable if the other person stops making payments and then you're going
00:34:44.980 | to have to pay a transfer fee to transfer the lease.
00:34:48.540 | But this is a really good market that has emerged to solve the problem.
00:34:54.300 | There are other interesting things about this market where buyers and sellers of leases
00:34:59.180 | are exploiting the terms of the contract in order to get the lease gone or to get a lease.
00:35:05.540 | So for example, if you really want to get out of the lease, depending on the amount
00:35:09.940 | of miles remaining that you have and the money that you actually put down, you might find
00:35:14.740 | yourself in a position where you want to offer an incentive and you want to offer an incentive
00:35:19.180 | where you'll be able to pay the person, where they'll be able to get the lease for less
00:35:23.860 | than you have to pay for it so that you can get rid of it.
00:35:28.380 | Let's say that you owe $500 a month on the lease and you just can't make that.
00:35:32.300 | Well, somebody might be willing to come up and you can put an incentive on there of $100
00:35:35.980 | a month and somebody will pick that lease up for 400 bucks.
00:35:38.820 | It's not perfect for you.
00:35:40.340 | Of course, you'd like to get out of it completely, but it might solve the financial problem.
00:35:44.260 | It gets you out from underneath the $500 payment.
00:35:47.180 | You can make the $100 payment, but it gets you out from underneath the $500 payment.
00:35:52.020 | So this can be something that you should really investigate.
00:35:55.940 | Forgive me, I made a mistake.
00:35:56.940 | I misread my notes.
00:35:57.980 | The two websites that I've looked at, I think there are more too, but I think these are
00:36:01.380 | two of the big ones, are leasetrader.com and swapalease.com.
00:36:06.980 | So those are the two that you want to check out, leasetrader.com and swapalease.com.
00:36:12.560 | Those are the basic options for getting out of the lease.
00:36:17.300 | You always have to weigh, is this the best thing to do or is this not the best thing
00:36:21.340 | to do?
00:36:22.340 | There's going to be a cost involved anyway and you have to run the actual numbers of
00:36:26.940 | your circumstance as always.
00:36:29.980 | Read your contract, call the dealer, get the information and then sit down and do some
00:36:33.420 | calculations and see if some of these options.
00:36:37.060 | If you can sell the car in the secondary market, come up with the cash.
00:36:40.260 | If you have the cash and you come up with it, that can work out well.
00:36:44.060 | If you don't have the cash, you'll end up trading the lease out or you might just wind
00:36:49.200 | up in this position where you've got to pay it out.
00:36:51.540 | But while you're paying it out, as you get to the end of the lease term, make sure that
00:36:54.860 | you're saving the money in order to be able to buy your next car, hopefully for cash.
00:37:02.980 | That way you don't have to deal with this challenge of payments.
00:37:07.340 | In the meantime, you can help educate other people so they don't get stuck in car leases
00:37:11.460 | unless they're getting rich and they just want to swap their cars out all the time.
00:37:16.940 | That's it for the show.
00:37:17.940 | I hope this has been helpful to you.
00:37:19.020 | It's a hot topic in the world of personal finance.
00:37:20.980 | Hope these advice is useful.
00:37:24.300 | It's really simple concepts.
00:37:25.300 | It often frustrates me when I hear people say it is to say you've got to take it on
00:37:30.540 | some sort of blind faith where it's don't lease vehicles instead of explaining how it
00:37:38.660 | actually works.
00:37:39.660 | So hopefully now that I've explained how it actually works that you find that a little
00:37:43.460 | bit useful and more helpful.
00:37:46.020 | That's it for today's show.
00:37:47.020 | Thank you so much for listening.
00:37:48.020 | Thank you again to those of you who support the show as patrons, radicalpersonalfinance.com/patron.
00:37:51.020 | If you'd like to book a phone call with me, radicalpersonalfinance.com/phonecall.
00:37:56.060 | And finally, don't forget about my quick six question demographic survey, radicalpersonalfinance.com/survey.
00:38:01.660 | That's super helpful.
00:38:02.660 | Working to sell more advertising to other companies.
00:38:06.600 | And so as I work on that, I need some good demographic data.
00:38:10.060 | radicalpersonalfinance.com/survey.
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00:38:21.020 | It's just there in the survey software.
00:38:23.020 | So radicalpersonalfinance.com/survey and I'll be back with you tomorrow.
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