Bad Idea for Rent

Jonathan Clements

IT RARELY HAPPENS these days, because I’ve been kicking around so long, but occasionally I’m taken aback by some completely nutty financial idea. This happened a few weeks ago, when I heard folks opine that you should always lease cars, not buy them—because cars are depreciating assets.

Say what?

To be fair, there’s a related idea, which is indeed sound: You want more of your wealth in assets that appreciate in value and less in those that depreciate. This is the reason to own stocks, bonds and real estate, while minimizing cash investments, purchasing cheaper cars and looking askance at collectibles, all of which will likely lose ground to inflation—and some of which will actually shrink in value over time.

But saying you should limit the money you sink into depreciating assets isn’t the same as saying you should never own them at all. My living room furniture is depreciating as I write this (and it would be depreciating even faster if I didn’t ban my stepdaughter from eating on the couch). But that doesn’t mean the savvy financial move is to head over to the local furniture rental outlet and pick out a new sofa.

Why not? The fact that the furniture is depreciating isn’t the deciding factor. Instead, what matters is the cost of renting vs. the cost of owning. And unless the furniture rental place is hellbent on losing money—and I strongly suspect that isn’t the case—then renting furniture is going to prove costlier over the long haul than simply buying the couch, coffee table and armchairs.

It’s no different with cars. Whether you buy or lease, the car will depreciate, you’ll incur transaction costs and there’s an explicit or implicit interest cost. That interest cost might be the rate that’s baked into the lease, the interest on the car loan you took out to buy the vehicle, or the opportunity cost (the interest you could have earned) if you bought the car for cash.

But whichever option you choose, you can be confident that regularly leasing new cars will likely prove more expensive over the long term—because the folks leasing the cars to you expect to make money in return for the extra work and risk that leasing involves. Sure, they may occasionally err and assume that the cars involved depreciate less than they do. But I wouldn’t count on it: They likely know far more about the car market than you do.

Moreover, if you buy your cars instead, you have the flexibility to keep them for longer—and that’s where the big cost savings lie. Whether you own or lease a car for three years, it’s a costly proposition. But if you buy the car and keep it for another half-a-dozen years or longer, your annual car costs will go way down. Better still, buy a used car that’s maybe three years old—and then keep that vehicle for half-a-dozen years.

So why do folks insist that it makes more sense to lease? I guess you could cook up some cockamamie example where you take the difference between the cost of leasing, and the larger initial and monthly payments on a loan to buy the same car, invest that money in stocks and somehow come out ahead. But let’s be serious: Nobody’s doing that—and, given the risk involved, there’s no guarantee it would work.

What’s really going on here? Ever heard folks say you should, “Take out the largest mortgage possible” or “Buy the biggest house you can afford” or “My big remodeling project has been a great investment”? Call me cynical, but I think it’s the same basic story: People spout financial nonsense to make something they want sound like something that’s financially prudent. Folks like the idea of owning a grand home and driving a new car every three years. But that doesn’t make it financially smart.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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