Never in my wildest dreams had it crossed my mind that I’d be leasing a car. Generally speaking, leases are a bad idea and one of the worst financial products a consumer could take on. It’s almost impossible to negotiate a deal that doesn’t favor the dealer in some way. You are basically renting a car for the length of the lease and have nothing to show for it when the lease is up.
So no one was more surprised than I when two weeks ago I signed a two-year lease on a car. I felt a bit dirty doing it, like I was committing the cardinal financial sin and selling my soul away. So I’m writing today to explain my actions given the terrible track record leases have for the consumer.
This deal happened only because my wife and I will come close to breaking even on the lease over those two years. I’ll be driving a new car almost for free.
The Unique Circumstances That Have Me Leasing a Car
This lease deal works for us based on our need, our driving habits, and a unique incentive offered by the state of Georgia for the purchase or lease of an electric car. The car we decided to lease is the all electric Nissan Leaf.
Our costs include:
The terms of the lease for two years (for a 12,000 mile driving limit per year) called for $1,000 down with payments of $377 per month.
(We had to negotiate hard for that amount! Most dealerships around Atlanta would not give us that rate. We knew, for reasons that you will see in a moment that the total expense mentioned above was our limit to make this work.)
We will also see an increase in on our electricity bill because we will have to charge our car each night. Our research indicated our costs would increase by about $30 per month.
Our insurance premiums will increase only slightly as we will be selling one of our current older vehicles and taking on a new one.
So the estimated costs for the lease over two years will be:
Down Payment: $1,000
Lease Payments: $9,048
Insurance Increase: $288
Total Cost: $11,056
Breaking Even on Leasing a Car
To break even on this lease deal has much to do with the state of Georgia where we live. Several years ago our legislature passed into law a $5,000 (at most) tax credit for consumers who wanted to pursue the purchase or lease of a certified Zero Emissions Vehicle. To that end, electric cars are starting to take on great popularity here. Charging stations are popping up all over, making the greater Atlanta area one of the biggest markets for electric cars in the country.
So in the next week or two, we will be sending our paperwork into the state and we will get a notice from them stating that our tax credit is approved based on the vehicle we leased. We will take the credit off of our 2014 state tax liability when Mrs. Luke1428 does our taxes. Now we won’t use it all this year, but whatever is remaining will be carried forward for up to 5 years. In effect, by leasing this Leaf, we will be paying $5,000 less in Georgia taxes over the next few years.
So the tax credit gives us a big boost in moving towards breaking even on the lease. It doesn’t make up the entire difference however, so $6,056 in savings will have to come from somewhere else.
Where is that big difference going to be made up? The additional savings will come from our reduced gasoline costs.
My wife has been driving our Toyota Tundra to work each day, averaging 135 miles per week. At best, the vehicle gets 14 miles to the gallon when driving in city conditions. Given the current national average of gasoline being around $3.00 per gallon we calculated a savings of $3,008 in gas over two years from her driving to work each day.
So now we are up to $8,008 towards the total cost of the lease. So we will have to realize $3,048 more in savings.
I mentioned we signed a lease deal that allowed us to drive 12,000 miles per year. With Mrs. Luke1428 driving the car to work each day we use up 7,020 of our allotted 12,000 miles. So we have an additional 4,980 miles on the lease that we have to use to make the deal work.
The total gas savings over those last 4,980 miles at $3.00 per gallon comes to $2,134 over two years (4,980 miles divided by 14 mi./gallon times $3.00/gallon times 2 years).
We will also realize a savings in some maintenance costs, such as changing oil and filters. There is no need for that in an electric car. Assuming a national average of around $30 for this service and that we would change our oil every 3,000 miles, we will see an additional savings of $240 over two years.
So our calculated savings look like this:
Georgia Tax Credit: $5,000
Gas Savings to Work: $3,008
Gas Savings Other: $2,134
Total Savings: $10,382
As you can see, we have come up short on the total deal $674. That’s $337 dollars a year or 94 cents a day.
I’m Not Recommending Leasing a Car
As you can see this deal works for us. I’ll pay $674 to get into a new car for two years. That’s a quality deal from my perspective.
However, we do face some risks in these ways:
If we don’t drive the car 24,000 miles in two years we lose on gas savings.
If we drive more than 24,000 miles in two years we will be charged excess fees for every mile we are over the limit.
If gas prices fall significantly we lose more in gas savings.
We can be charged if there is above average damage to the vehicle when we return it.
If we are not forward thinking enough, we could be unprepared to make another car decision in two years when the lease is up.
Most importantly, we have to plan our driving more than the average person. The range of the Nissan Leaf we leased is only 90 miles. And of course there is not a charging station on every corner.
Ironically, the best case scenario is that gas prices stay where they are or increase slightly. I can’t control that though so I’m not even going to worry about it.
The biggest issue for me is what to do in two years. Will the tax credits still be available? I don’t know. Will we be able to negotiate another lease that works? I don’t know…it was really hard this time around. What will the needs of our family be in regards to how much we are driving? Again, I don’t know.
So we will begin to save immediately for that circumstance by putting money aside each month into a future car fund. In two years we should accumulate enough to purchase a nice used car should all the tax incentives fall through or our family needs change. We will be prepared in two years to make another good call that makes financial sense for the family.
For now I’m excited to have a new Nissan Leaf. I’ll share more about the process of leasing a car later and what to look out for. As I already have mentioned we worked really hard to get this deal to make financial sense. We could not (and would not) have done it without the benefit of the tax credit.
I’ll drive the Leaf for several months and then do a review of the car. The early returns are positive as far as the driving experience goes.
Questions: Have you ever thought about leasing a car? Why did you do it? Based on our scenario, do you think it was worth it to pay $674 over two years to be leasing a car? Do you have any experience with an electric car?