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Home / Ways to Save / My $4,779.37 Mistake: A Warning About Car Leasing

My $4,779.37 Mistake: A Warning About Car Leasing

I’ve shared a lot on this blog. From my $86,000 mortgage payoff in 2 years to my 3-day home sale. Much of the news lately has been very positive.

His post, however, serves as a warning. DO NOT make the same MISTAKE that I did.

I recently wrote an article for money expert Clark Howard revealing the 13 things I learned about money in my 20s. My experience with leasing a car made the list.

Now, I want to explain why a money-conscious guy like me got a lease in the first place and why I’ll never do it again.

This story begins in May 2013. Shortly after my mortgage payoff, I decided that I wanted a new car. There wasn’t anything “wrong” with my old car. It was a bit cheap, I’ll admit. But it got me to work and back, which is all I needed it for.  Living in the city of Atlanta, I didn’t really use my car once I got home.

Still, I decided that I would allow myself to buy a new car because I could afford it. If you can afford it, you can buy it. That’s one of my financial core values. I test drove a number of vehicles and ended up liking the Audi A4 the best. This is a car that retails for about $35,000. In retrospect, that seems a bit excessive for someone who only drives about 10 miles a day.

At the dealer,  I planned to buy the car with cash. The salesman, however, talked me into a lease. He said the added maintenance package made leasing a better value and suggested I get the lease, then buy the car at the end of the lease. Having heard horror stories about leases, I was hesitant to sign on the dotted line.  In the end, I went along with the lease.

I pulled off the lot and everything was great. I enjoyed driving my car. I recall uploading a picture to Facebook, which got a number of “likes” and “comments” from those closest to me. My friends couldn’t wait to go for a spin. I think my dog enjoyed the Audi A4, too.

Everything was going smoothly, even after I quit my full-time job in January 2014. I was able to continue making the payments without a problem because I had no mortgage payment. Looking back, I’m amazed that I was able to save more than 60% of my income during that time of freelance employment.

Longtime readers know that I gave up my mortgage-free lifestyle in order to return to my hometown a few months ago in May 2014. That’s when my relationship with my car turned sour. First, I now live in the middle of a vibrant city, DC. There’s  little need for a car, except for the fact that I work an overnight shift when the subway doesn’t run. Secondly, the costs are outrageous. In addition to my $500/month car payment and a 10% city tax, it costs me $300/month to garage my vehicle. Parking was FREE in Atlanta.

After a few months of coughing up about $1,000 a month to drive, I decided it was time for the car to go. Unfortunately, my options are limited. With an Audi, using a website like LeaseTrader isn’t the best option. That’s because Audi would not take my name off the lease agreement.  So, if the person who took over my lease defaulted, I would still be held responsible.

My best option was to sell the car. I took it to CarMax, which offered me $26,000 for the 2013 Audi A4 in great condition. Unfortunately, I owed way more than that. I ended up paying CarMax $4,779.37 to get rid of this car, which is equal to about 9 months of payments. I had 28 remaining on the lease, which had a 42-month term.

Obviously, had I bought the car with cash and sold it– I would have had to pay up as well. However, I think it would have been less than I ended up paying because my car had such low mileage– roughly 8,000 miles.

Now, I plan to ride the subway when possible. There is bus service that can get me to work at 2am, though it is inconvenient to where I live. I may take a cab some days or use Uber, which will still be about a third of the cost of maintaining the car. (Get a free ride by signing up for Uber using my link)

In the grand scheme of things, $4,779.37 isn’t a lot of money. No wait, yes it is! There are so many things I could have done with that money. That’s why this hurts so much. However, continuing to pay for the car, parking, insurance and gas– was taking a toll on me. The Audi A4 fit my old lifestyle, but not my new one. And come to think of it, driving an Audi never really fit my lifestyle. It’s not who I am. I’m way too cheap to be driving that expensive car!

To summarize, here’s my problem with leases. Life is unpredictable. You never know what curve balls it’s going to throw at you. Leases are contracts. They are unforgiving. Audi didn’t care to hear about how my circumstances have changed. They care about one thing: collecting payment. I encourage you to never lease a car. I have $4,779 reasons why I wish I didn’t. If you insist, make sure you investigate how you can get “out” of a lease before you drive off in your new car.

Leave a comment below and I’ll see you on my Facebook page!

 

23 comments

  1. Wait, how did you sell a car you were leasing?

  2. Sounds like you didn’t understand what leasing is. You can’t say you lost 4779$ because of leasing without first calculating what would have cost you to sell the brand new car as well.

    Your total lease cost was 4779$ + whatever payments you made earlier.

    If you had purchased the car with cash, you would have paid more than 26,000 initially so when you sold it the total cost would be the purchase price minus 26,000$ which should be fairly close to what your lease cost is give or take 2-3K due to added expense of the lease.

    Usually in good lease deals, the overhead of the lease shouldn’t be too large thus there wouldn’t be a huge difference between buying the car at the end of the lease or purchasing it initially. The bigger difference is in the monthly payments mostly.

    • I am calling it a $4,779 mistake because that’s what I had to pay to get out of the lease. I believe I would have lost about $2,000 selling the car– had I paid cash.

      • Do I understand correctly that you believe you could buy a new Audi A4 for around $35k cash, drive it for 16 months and 8000 miles, and sell it for $33k? Do you have a newsletter I can subscribe to? ;)

        Come on, Michael. Obviously leasing isn’t right for many people, arguably including the majority of people who do it. But without seeing some hard numbers, from this perspective, it doesn’t really sound like you got burned too badly by the lease.

        If you paid around $35k, you got a zero option “Premium” car with FWD which will be hard to resell in the North-East, effectively depreciating quite a bit more than you might expect. “Free” or not, you purchased AudiCare for the better part of $1k and only took advantage of the 5k mile service which is a courtesy of purchase regardless. Assuming you put little to nothing down, you had access to over $30k cash to invest, which should have earned you a significant portion of your “loss”.

        Audi leases generally apply a fairly realistic residual value which works against you in a lease. Take a quick glance at BMW numbers and you quickly conclude that they must be willing to lose money on the back end but satisfy shareholders by selling cars. Mercedes has followed that lead in recent years, but Audi hasn’t. Your 42-mo residual was probably in the 53-55% range, while a comparable BMW 3-series was probably around 6-10% higher. That’s a couple grand that BMW is willing to lose to get a signed contract.

        I can appreciate that the conclusion is correct — beware leasing, it rarely works out if you’re not taking the lease payment as a tax deduction (like for a small business owner). But it doesn’t sound like you really got burned by this one. Post some detailed numbers and do all the math. There’s an interesting exercise in there, but you either haven’t done it or didn’t show your work.

        • Thanks for writing. This post was not meant to be an essay on the pros and cons of leasing– or to provide a list of numbers. It’s a personal blog.

          However, since you asked:

          The agreed upon value of the car was $34,240. The car has the lighting package, so it’s not exactly zero option. I did have it appraised at a CarMax in Georgia. They offered me slightly more, but it had only 7,000 miles at that point.

          That $34,240 figure is before the $600 documentation fee, $700 acquisition fee and roughly $2,000 in sales tax– paid upfront as required in Georgia. Interestingly, when I moved to DC, the city would not recognize that I had paid sales tax on the vehicle and charged me an additional $50/month sales tax.

          I also put $2,000 down. You are right that I had $30,000 to invest. So, you are correct in saying that having that money to invest made up for some of the loss.

  3. I don’t quite get your rational in your situation. What would have happened if you had purchased? Wouldn’t you be in the same loss situation? I’ve leased before and am leasing now.

    Seems no matter if you purchased OR leased you immediately take a hit on the car value.

    • Definitely. I would have lost, but I believe about $2,000. If leasing works for you, great. For me it didn’t work because my job relocated me to a city where owning a car is more trouble than it’s worth.

  4. How would your experience have been different if you had bought the car? It sounds like your situation would have been the same—and you would have lost about the same amount of money.

    • Thanks for your comment. From my calculations, I would have lost about half as much. My car had very low mileage, though obviously it lost value immediately after I took it off the lot.

  5. I came to this blog-post via Consumer Reports consumerist.com, which is linking to your leased car return issue post. I not trying to be a troll, but in all seriousness, based on your this post I don’t think you know much about finance. Perhaps leasing the car was bad idea, perhaps not. The info in your post was not sufficent to decide either way.
    You should have compared your actual costs to the estimated net cost if you had bought the car in cash and then sold it to carmax after you moved instead.
    This would implicitely include the key factor that is missing from your analysis: the depeciation of the car, which is independent of buying or leasing.
    Note that if you could have bought the car for $30K and carmax valued the car at $26 then the car lost at lost at least 4K in value whether or not you leased or bought in cash. You didn’t specify the number of lease payments you made or the actual price you could have bought the car (only > 30K) so I can’t do the correct analysis; but it would look something like this:
    1) I could have bought the car for ‘B’
    2) I made ‘L’ in total lease payments and lease orgination fees before getting rid of the car
    3) The car was worth ‘F’ at the end (what carmax would pay)
    4) I had to pay and extra ‘X’ to close out the lease end transaction.

    Calculate (X + L – B + F )
    This is would be worst-case estimate for the extra cost (if positive in value) for the lease-return versus buy-return scenario. I say worst-case because it doesn’t factor in the interest or investment returns that you would have lost if you had paid cash. Factoring that would reduce the calculated value.

    • Thanks for your comment, Tom.

      I guess I could look up all of the documents to give you precise numbers, but that wasn’t the point of this post. I don’t need those numbers to say that leasing was a bad idea. It was. I know that 100%. The reality is that my life situation changed and having a car became more trouble than it was worth after moving, about one year after I got a new car. Either way, it would have cost me money. Getting rid of a new car one year later is never good. However, since my car was in excellent condition and only had about 8,000 miles, I believe I wouldn’t have owed quite as much had I bought the car with cash and sold it privately.

      • Re. the advantage of a private sale if you had bought the car originally
        The details are not clear, but Carmax apparently negotiated with Audi Finance to close out your lease and buy the car, that means that you could have done the same (purchase the car/terminate the lease) and then sold the car yourself to a private party to capture the gross profit Carmax made in the transaction. This option was available to you if you still have the cash on hand to buy the car outright (at least for a short time to buy-sell).
        Though I suppose it’s possible Carmax may be able to get a better deal than an individual (not sure), I only say that because perhaps the finance company sees an inquiry by Carmax as a sign that the lease loan is going to be in default soon so they may want to do something about it before that happens (this a complete conjecture).
        It would have been helpful to hear what the lease company said it would cost to buy the car (the max would be all the remainig payments + end buy price specified in lease).

        • Absolutely I could have purchased the car, then resold it on the private market.

          There was no negotiation. I went into CarMax and got a quote, several times. The $26K quote is about 1K less than the estimate on Edmunds. Then, CarMax called Audi Finance for a payoff quote, which was $30,728.98. I had $14,000 left in payments and the residual value was $18,000.

          Had I bought the car with cash in the first place, I wouldn’t have been paying the rent charge every month. Also, I paid sales tax upfront in Georgia. However, DC did not recognize that payment and has been charging me $50 a month in sales tax– essentially double taxing me.

          A closer look at the numbers: $550/month payment + $300/month parking + $100/month gas + $80/month insurance = $1,030/month.

          And that figure is just to drive to work. I don’t drive much outside of work in DC. So, given 22 work days per month, that’s $46/day in commuting costs.

          Now, my options are $3/day for a bus or $10/day for Uber one-way and taking the subway home.

          I decided that since I no longer live in a city where a car is necessary, it made the most sense to get rid of the lease as quickly as possible. In a few months, I don’t think I will regret it because my commuting expenses will be reduced drastically.

  6. I’m not a fan of car leasing, but I think you took completely the wrong lesson from this experience. You said you didn’t need the new car, but you got it anyway. I’m not taking issue with that part of it. “Need” is a relative term– all we really need is food, water, and shelter, but we should be able to allow ourselves some luxuries or indulgences in life if we manage them responsively.

    But once you made the decision to acquire the car, it didn’t really matter whether you whether you leased it, financed it, or paid cash in full. By attempting to dispose of the car after barely a year, when the payments you made hadn’t yet caught up with the car’s drop in value (which all new cars suffer from the minute you drive them off the lot) GUARANTEED you would lose money, regardless of how well kept or low mileage the car was.

    If you had gotten a car loan, you’d have been in pretty much the same boat because what you made from a sale still wouldn’t have covered what you owed. Maybe you wouldn’t have had to cough up quite so much to make the car go away as in your lease scenario, but you still would have been many thousands out of pocket.

    So again– leasing? Not the point, and indeed, completely irrelevant.

    The moral of your story is that yes, circumstances change, and that’s why we need to think through any major purchase or financial commitment because we never know what’s coming around the corner. That’s not a reason to not ever buy a house, a car, etc. but it’s a reminder that the decisions we make today can cost us more than we expected tomorrow.

    • Thanks for your comment, Joseph! I think your comment repeats several of the things I said in my post. Fortunately, $5,000 isn’t going to break me– so I am choosing not to dwell on this mistake. When I got the car, I never anticipated the circumstances that would bring me to where I am today– but in the end, it has worked out. I sold my paid-off condo for a nice profit. The downside is that this car mistake has eaten into a fraction of that profit.

  7. Michael – kudos to you for being so straight forward and honest about this decision. I’ve never before seen the numbers associated with leasing, and it’s blood-chilling :) I think the other commenters aren’t getting the point – that leasing is just an absurd vehicle (pun intended!) to purchase a car. Good for you for seeing the light.
    Emma @ emmalincoln.com recently posted…the gift of the magiMy Profile

  8. You should have never leased or purchased a car with such a poor residual value, 52.5% seems really low for a 42 month lease. The way to come out ahead in a lease is to find car manufacturers that offer leases with inflated residual values and good money factors. Often times you will come out ahead vs buying new. For example I leased a 2013 Acura TL tech package car ($36,000 agreed on price) for 36 months for $350 a month plus tax and 0 start up fees. That is because I went into the dealership knowing my numbers and knowing whether or not the price they offered me was a good deal or not. Buy a lease calculator app for your phone to use while you are negotiating. Often times sales people will try to shuffle numbers around to confuse you. I would have done way worse buying the car outright and selling it after 3 years.

    Leasing is mostly bad for people because most people don’t do their homework IMHO.

  9. This has me quite confused, to say the least. You can buy out your lease at any time with cash, and then sell your car….why not just do that?? Also, I think you are forgetting the fact that you would have paid FULL sales tax to buy it outright in the beginning vs the partial number you paid during the lease. I think you were misinformed going into the lease, and still misinformed today, and your post is doing a disservice to those reading it.

  10. hi michael, found your blog by googling car max and leases. I have a vehicle that I have to get rid off [going overseas & Toyota won’t let me take it with me. and you’re right..car companies don’t care what your circumstances are they just want that $$]
    anyway, I’m thinking carmax is the better choice for me since there’s a year left and going through the hassle of finding and signing it over to someone given my time frame isn’t going to work.
    So my question is this, once carmax gave you their “bid” for your vehicle and you owed Audi, how did you go about paying the $4k? Payments or in one lump sum? I’m anticipating owing $1k however could be more and don’t have that upfront.
    Thanks in advance!

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