A Suze Orman exclusive

Leasing Bermuda Triangle
Okay, I know some of you are thinking I am far too pessimistic. You are convinced you will be able to keep your miles below the limit, and you're such a neatnik you are confident you won't get hit with wear-and-tear charges when you turn in the car. So you've got nothing to worry about.

Ha.

I am here to tell you that once you lease you are likely to be sucked into a never-ending cycle of leasing - a cycle that is going to cost you tens of thousands of dollars more than if you had just bought a car and held on to it for a reasonable length of time. This is true even if you need to take out a loan for the car.

Here's the deal. As I explained earlier, chances are pretty good you aren't going to want to buy the car at the end of the lease period. So instead you turn the car back into the leasing company. Which means you need a new pair of wheels, and, because your inflated ego can't bear the thought of accepting a lesser car than the one you just returned, you end up leasing again, merely to preserve your current level of "status."

The problem is that you are subjecting yourself to a life of having to make a car payment every month. You never stop paying for your car, because you are always leasing - borrowing it - from someone else. At $400 a month you are shelling out $4,800 a year, every year, maybe for the rest of your life.

Now what if instead of leasing every year for the rest of your life, you buy a car and finance it over a four-year period. Let's say your payments are still $400 a month (yes, I know that with a loan $400 a month means you won't be driving such a fancy car, but that's part of the point). Even if you do finance it, after the loan is paid, if you just drive the car for another five years (if I can keep a car for nine years so can you) you now could use that $400 a month to tackle financial situations in your life that are probably really DRIVING you crazy. Such as using it to pay off the credit-card debt you are paying 18 percent interest on, or your student loan debt that you consolidated a few years ago at eight percent. Or to save for a down payment on a home. Do you realize that after five years at about a six percent return you would have nearly $28,000 saved? Or hey, here's a novel idea, you could take that money and use it for the down payment on your next car - even pay for it outright if you buy what I call a "new used" car (see below). But I know you lease maniacs are die-hards, so let me continue to explain why leasing is just plain stupid.

There's No Airbag If You Hit a Financial Rough Spot
Think about this. You're leasing a car, and one day while (let's say) driving around to make sure everyone can see how great a car it is, you are in an accident that totals your glamorous ride. What happens when you total a leased vehicle? Well, for starters, your insurance will only pay for the value of the car-not what you owe the leasing company on it. And most likely you are on the hook for a lot more than the car is worth because of that inflated residual value I mentioned earlier.

Or consider another possible disaster scenario. What if you lose your job and can't make your lease payments? If you call up the leasing company to explain your hard-luck story, don't expect any sympathy because you won't get any. I don't even really blame them for that. You signed a contract and they certainly have a right to demand you keep up with your monthly lease payments. You could turn the car in, but you would still owe them $24,000. And when you try to sell the car on your own, you discover all you can get for it is about $17,000. So even if you sell the car you would still owe the leasing company $7,000 to settle your account with them. That's $7,000 you don't have.

Sadly, that's probably your best option. If you decide to just give them the car back, you're in for a deeper hurt. The leasing company could sell your car to its used-car dealership for $5,000 and still demand you pay them the difference between that $5,000 and the $24,000. That's a $19,000 nightmare. Don't think it can happen? It happens all the time.

The thing to notice is that this is far worse than what would happen if you fell on hard times and couldn't make the payments on a car you bought with a loan. Chances are if you struck a good deal on the price of a car you bought - and let's say you did buy a new used car - you have a pretty decent chance of being able to sell the car for about what you still owe on the loan. There's not going to be a huge gap between what you can get for the car and the balance of the loan.

The Lease Tax Break - A CAR-bohydrate You Should Really Avoid
Now I bet some of you leasing types are boiling right now, and you want to hit me with the "Yeah, well what about the great tax break you get for leasing? That makes a ton of sense especially if it's for my business." I disagree. Even for a business. But that's a different issue. This is a finance column for individuals, not business owners. And if we're talking about leasing for personal rather than business reasons, you have got to be joking to use the tax excuse. Today we have the lowest tax brackets in your lifetime. For every dollar you spend on a lease, you might get back 20 cents or so. If I am not mistaken, that still means you are paying 80 cents to lease. That's 80 wasted cents that makes no sense.