146: Lease or Buy? The Real Math Behind Your Next Car

0:28You're about to make a trade. Accompanied by his natural ally, Doug. Uh, Lemu, is that guy with the binoculars watching us? Cut the camera. They see us. Only pay for what you need at LibertyMutual.com. Liberty, Liberty, Liberty, Liberty. Savings vary. Underwritten by Liberty Mutual Insurance Company and affiliates. Excludes Massachusetts. Hey, everyone, and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify brought to you by Public.com. By the end of this episode, you'll understand the real math behind leasing versus buying a car. and you'll know exactly which option makes sense for your financial situation.

1:03My name is Austin Hankwitz, and I'm joined by my co-host, Robert Croak. Robert is a seasoned entrepreneur with lifetime revenues of over$300 million, and I'm a multimillionaire in my late 20s with a background in finance and economics. As the show name might suggest every episode, we talk about rich habits as they relate to business, finance, and mindset. So Robert, what are we going to be talking about in today's episode? In this week's episode of the Rich Habits Podcast, we're tackling one of the biggest financial decisions most people make every few years. Should you lease or buy your next car?

1:35And we're not going to give you the generic answer you've heard a million times. We're going to break down the actual math, expose the hidden costs most people miss, and show you exactly how to make the right decision for your situation. Car prices are insanely high. I mean, the average new car has skyrocketed to over$50-something thousand dollars. Used cars aren't much better. I mean, they're averaging, what, Robert, like$25 ,000,$27 ,000 right now. And the worst part is the second you drive the car off the lot, it instantly loses thousands of dollars in value. In just the first year alone, new cars depreciate by between 15 % and 30%, depending on the car.

2:14So the burning question becomes, do you lease that depreciating asset and trade it in every few years? Or do you buy it, keep it long term, and ride out the depreciation? Most people have strong opinions on this, but very few actually run the numbers and understand the numbers and how it affects you. So by the end of this episode, you're going to know whether if leasing or buying is the right move for you. And more importantly, you'll know how to avoid the expensive mistakes a lot of people make along the way. So, Robert, let's start with the basics. What does it actually mean to lease versus buy?

2:48All right, so let's set the table here, make sure everyone understands exactly what it means to lease a car versus to buy a car. Because a lot of people don't understand what they're signing up for. And the dealerships love that confusion, right? So when you buy a car, very straightforward. You either pay cash, which like congrats, you're rich, or two, you take out a loan, which is what a lot of people do. Now, if you take out that loan, right, you're financing it, you're making monthly payments toward owning the vehicle one day, right? Eventually, I will own this vehicle once I pay it off. Now, once the loan's paid off, the car is yours.

3:19You own it. You got the title. It's free and clear. You can drive it till the wheels fall off. You can trade it in. You can do whatever you want, right? It is your car. So that's owning and buying a car. Now, on the flip side, you have leasing. When you lease a car, you're essentially renting it for a set period of time, usually two to three years. You're paying for the depreciation of the vehicle during that time plus interest and fees. So at the end of the lease, you return the car back to the dealership. You don't own anything. You walk away with no equity in your car itself. And you've been making payments for three years now and you have nothing to show for it.

3:53So here's the trade-off. Lease payments are usually lower than loan payments because you're not financing the full value of the car. You're only paying for the portion of the car's value that depreciates during the lease term. So think 24, 36 months. So on the surface, leasing looks attractive. Lower monthly payments, you get a new car every few years, and you're always under warranty. So you guys need to make sure you're taking a lot of notes in this episode because we're going to break down a ton of math. But here's what most people miss. Over the long term, leasing is almost always more expensive than buying, and we're going to prove that to you with the real math in just a minute.

4:33So before we get into the numbers, let's talk about who leasing makes sense for because look, there are situations where leasing is the right call. It's just way fewer situations than car salesmen would like you to believe. Yeah. So let's talk through that, right? Who should be leasing a car? So leasing might make sense if you fall into one of these categories. Category one is you're a business owner and you can write off those lease payments. If you're using the car for business purposes, you can deduct the lease payments as a business expense. Math changes significantly once you look at the after tax numbers there, right?

5:05You get that business deduction saving you money at the end of the year. Second, if you absolutely need a new car every few years and you are willing to pay for that preference, right? Some people just like having the latest model with the newest tech. And if that's important to you and you understand that you're paying a premium for it, that's fine. You earn your money, spend it any which way you want. We're not here to tell you what to do. Just make sure you're doing it with your eyes wide open and you're not lying to yourself about the cost. Yeah, I fall into this category because I am a business owner and I don't like friction.

5:36So I've been trading out of leases for decades because I like the convenience of having a new car under warranty and I don't have to mess with anything. But it's important to understand all the numbers so you see where you fit in. And that brings us to number three. If you drive very low mileage, typically under 10 to 15 ,000 miles per year, most leases come with mileage limits. So you have to think this through because if you go over, you're going to see in the fine print, you're going to pay 25 to 30 cents per mile in excess fees if you go over, and that adds up fast. But if you work from home, live close to everything, and don't drive a ton, leasing penalties definitely won't destroy you.

6:18And number four, if you absolutely hate dealing with maintenance repairs, when you lease, you're typically under warranty the entire time. You're not paying for major repairs. You're not dealing with unexpected breakdowns. You drive the car for three years, hand them back the keys, walk away or lease another one. So for some people, that peace of mind is worth the premium. Now, even if you fall into one or more of these categories, you still should be running the numbers, right? Because in most cases, buying is going to be a better financial decision. So to Robert's point, take out the notepad, get your pen ready.

6:50We're going to go through some math here, right? So this is the real math behind leasing versus buying real world comparison. We are going to use a$40 ,000 car, which I would believe is a pretty standard price for something like a Toyota or a Honda. Robert and I found a couple brand new Toyota RAV4s here in Nashville at about$40 ,000. So these are real numbers, right? Nothing crazy, just a normal, reliable car that most people would buy. The number one most popular car in America is Toyota. And then I think it was Ford, Chevy, and Honda. But the Fords and the Chevys were all trucks for business owners.

7:24So most average Americans are buying Toyotas and Hondas. So that is our instance example here. So in the first scenario, you lease that$40 ,000 car for three years. Based on typical lease terms, your monthly payment is going to be about$450. Over three years, that's$16 ,200 in lease payments. At the end of those three years, you return the car, you don't own anything, you don't have any equity, and now you need another car. So you lease again. Another three years go by, another$16 ,200, and now you've got six years,$32 ,400 on lease payments, and you still don't own a car, and you still are making these monthly payments.

8:06So that's leasing. Scenario two is, let's say you buy that same$40 ,000 car, but you do it with a loan. Things are different, right? So the first difference here is the down payment of$4 ,000 in our situation. 10 % down on a car loan is pretty average or normal. So just be prepared for that. You got to have that money there. So you put$4 ,000 down and the other$36 ,000 is financed at let's say a six or 7 % interest rate over five years. Your monthly payment is about$696 a month in that instance. Yes, it is materially higher than the lease payment, about$246 more. But the difference is after five years, you pay off the car and you own it, right?

8:48The loan is paid off. You can keep driving the car for another five years or whatever you want to do, right? You have zero car payments, five years where you can redirect that would have been$696 a month payment to investing or saving or paying down other debt that you have. So over that 10 year period of time, you paid roughly $45 ,760 all in for this$40 ,000 car when you buy it, right? When you include those interest payments, That's your down payment plus the interest on the loan. But now you own an asset that's probably worth between$8 ,000,$10 ,000,$12 ,000-ish depending on condition and mileage.

9:24Meanwhile, if you would have leased the same car, you'd have made lease payments, let's say for the 10 years straight, we're 10 years into the ownership, which is roughly$54 ,000 and you'd own nothing. You'd still need to lease another car or buy another car, but keep in mind, you'd never be driving a car that is six to eight or 10 years old. But if you're going to drive it to the wheels fall off, the numbers really do add up to buy. So here's the difference. About$12 ,000 to$16 ,000 ends up being in favor of buying. And that's really being conservative. And if you keep the car longer than 10 years, the gap gets even wider.

10:02So this is where people really mess up. They look at the monthly payment and think, okay, it's$450 ,000 to lease, and it's way better than $6.97 to buy, I can afford the lease. But they're not looking at the total cost over time. You always hear Austin and I talk about it with houses, with cars. You have to understand the total ownership cost. So they're not thinking about the fact that in five years, the person who bought the car is done making payments. The person who leased the car is still on the treadmill. I hope everyone followed along there, right? Because we just laid out the real math behind buying a$40 ,000 car brand new, what you'd have at the end of that 10-year period of time, which is still that$8 ,000 or$12 ,000, versus the leasing of that same car over that same period of time.

10:49Assuming you re-up a lease, you drive something new, that's cool, right? You get a new vehicle every three years, but during that period of time, right, $54 ,000 has left your bank account, and it's just gone. And it's gonna continue to leave your bank account because you're not actually owning anything. You're just signing up for a new lease every three years. So after that five-year period of time, you have this$696 a month that's completely freed up. If you're like us, we are going to be investing that money. So it is growing for us over time. And Robert, we all know the best place to invest.

11:23The easiest way anyone can begin investing towards their future is on public.com. They make it incredibly simple to build a multi-asset portfolio, including ETFs, crypto, stocks, bonds, options, and more. And they also offer access to industry-leading yields of up to 3.8 % APY for that emergency fund. And for a limited time, you can earn a 1 % match on all IRA deposits, IRA transfers, and 401k rollovers. It's$1 ,000 free money for every$100 ,000 you roll into their platform. So that old 401k you haven't touched in a while or that IRA is sitting on that boring, stinky broker, roll it over and get your 1 % match.

12:01Fund your account in five minutes or less by heading to public.com front slash rich habits to claim your 1 % match today. Paid for by public investing. Full disclosures in the podcast description. All right, Robert, let's now break down the hidden costs that no one is really getting told about at these dealerships when it comes to leasing. I love this because the dealership's not going to tell you, the salesman's not going to tell you, and I don't think most people actually understand. I did this for several years in car dealerships as a finance manager, and I can't wait to share this with all of you listening.

12:35First, it's the mileage penalty. Most leases cap you at between 10, 12, or 15 ,000 miles per year. And if you go over, you're paying that 25 to 30 cents extra per mile. So let's say you drive 18 ,000 miles a year instead of 15. That's 3 ,000 miles at 25 cents per mile. And you're paying an extra$750 at the end of the lease. And that could be every year of the lease. Do that over the lease's cycle of three years and you've wasted$2 ,250. $150. That's money you're never getting back. Number two, the wear and tear fees. They don't tell you about this, but when you return the car, that dealer is inspecting it with a fine tooth comb and they are not going to be lenient.

13:20So any dents, scratches, stains, excessive wear, any of that gets charged back to you at the end of the lease. So you think about that small scratch on the bumper that you tried to touch up. That's going to be a couple hundred bucks. Stain on the seat, 300 bucks, worn tires,$500, maybe$1 ,000. These fees will add up fast and most people get hit with$500 to$1 ,500 in wear and tear charges they weren't expecting and didn't budget for. And number three is the disposition fee. At the end of the lease, some dealerships charge a disposition fee, which is usually between$300 and$500 just for letting you return the car.

14:00And this is pure profit for the dealer that you're literally paying them to take the car back. This is crazy just hearing all these. I didn't know that some of these existed here. Here's another one that people probably didn't know about, the acquisition fee, right? Because this fee is baked into your lease terms. So most people don't even realize they're paying it. And it's between$500 and$1 ,000. It is literally just another way for the dealership to make money off you. Now, keep in mind with all these fees when you're leasing a vehicle, you want to negotiate price and fees just like you do when you're buying a car.

14:33You need to negotiate down the best deal you can get, which then plays in your favor to get a better monthly payment on the lease. And now, Robert, it's so important to talk about the biggest hidden cost of all of them, which is you're always making a car payment. When you lease, you never escape a payment. You're on a treadmill, right? You're a hamster on a wheel, just always making a car payment. Every two or three years, you're signing a new lease and you're just starting the cycle over. There's never a point where you are payment free. When you buy, yes, there's higher payments during that loan term, but once it's paid off, you are done.

15:06And those payment free years are where you actually build wealth. That's when you take that$6.96 a month, you deposit it on public.com and you invest it in the VOO or QQQ or VTI or whatever other ETF tickles your fancy. That's when you use it perhaps to even pay off other debt. That's when you actually can get ahead when it comes to building wealth, is finding the margin in your budget and investing it for your future. So let's get into the smart middle ground of buying used. You've heard me say this for years and years. If you want a new car and you're going to trade out all the time, lease. But if you're going to get something and you're going to buy, buy it used and drive it till the wheels fall off, and we're going to break that down for you.

15:51If you buy a three-year-old car instead of a new one, someone else has already eaten the worst depreciation in the car's lifetime. So that$40 ,000 car is now worth$26 ,000 to$28 ,000. So you're essentially getting that same car for a fraction of the price, same features, same reliability, just three years old. And many times there will still be partial warranty left on this car, but you're not paying top dollar for it. So let's break down the numbers. If you finance a car$26 ,000 instead of a car at$40 ,000, your monthly payment is going to be way lower. So you're taking$480 a month versus$696 per month for the new car and you still own it at the end.

16:34That is why we believe if you're going to keep a car and drive it to the wheels fall off, buy it a couple years old, save all that depreciation. You avoid the massive depreciation hit by a new car. You've heard it for decades, probably from your parents and your grandparents. Once you drive it off the lot, it's worth a lot less. And you get a reliable vehicle by buying used that still has some of that warranty left. And your total cost of ownership is way lower than either leasing or buying new. So keep that in mind. So if you're trying to build wealth, buying a quality car and driving for 10 years is one of the smartest financial moves you can make.

17:10That is why smart people that are building wealth actually do this. They don't lease new cars every three years unless maybe they're a doctor or a lawyer or someone that is, you know, important in stature and they have to have a new car to impress people. They buy reliable used cars and they drive them forever. That's why if you drive through any super wealthy neighborhood and look in the driveways, yeah, you might see a Ferrari here and there. But most of the time you're going to see a used Honda or a Toyota or a BMW or a Lexus. you're not going to see the brand new shiny cars in the driveway because it's just not the right play.

17:44So now you're asking yourself, how do I know if I should be leasing or if I should be buying? So here's our framework for that. The first step to take is to honestly look at yourself in the mirror and ask about how long you plan to keep the car. If you're going to keep it for seven, eight, nine, 10 years or more, you should buy it. If you know for a fact that you're going to want to get a new car every two or three years, you should consider leasing. But you need to be honest with yourself about this. And the more honest you can be, the better. Now, step two is to calculate your true cost of ownership.

18:16You don't just look at that monthly payment. You need to add up the down payment, the monthly payments, the insurance, the maintenance, the fees, all of the things that go into owning a car, then divide it by the number of years you're keeping that car. Because that is your real total annual cost of ownership. Run the numbers for both leasing and for buying and see which one actually costs less. Step three, consider your mileage. If you drive a lot more than 15 ,000 miles a year, leasing is going to hit you with penalties. So buying probably makes more sense. Step four, think about your cashflow.

18:50If lower monthly payments are critical for your budget right now, leasing might give you the breathing room that you need, but understand you're paying for that flexibility long-term. And step number five, factor in your business situation. If you're self-employed or own a business, you can write off the car. Leasing might make sense from a tax perspective. Talk to your accountant to make sure. And here's one more thing. Don't let a car payment control your life. Whether you lease or buy, keep the payment reasonable. Just because you're approved for$1 ,000 a month shouldn't mean you should buy that.

19:24And a good rule of thumb is to spend no more than 10 to 15 % of your gross income on the vehicle expenses, and these are all in expenses. So you have to look at payment, insurance, gas maintenance, everything, the total ownership cost. And if your car payment is eating up 20, 30, 40 % of your income, you can't afford that car and you're sabotaging your ability to build wealth by living beyond your means. Robert, it's pretty obvious that the car industry is designed to keep you in this forever payment cycle, right? Dealers make more money when you lease, they make more money when you trade in that car every few years when you buy another car they want you on the car payment cycle treadmill forever that is their business model but you don't have to play their game you can buy a reliable car like me i have a toyota 4 runner it is five years old you can pay it off and you can drive it for 10 years you can then redirect those would-be car payments to investments on public.com and you can build wealth instead of actually having to hand over all your wealth to a car dealership.

20:28And the people who build wealth don't drive the flashiest cars. They drive the smartest cars. They make decisions based on math and not emotion. And they don't let a depreciating asset sabotage their financial future. So be smart, run the numbers, make the decisions that's right for your situation, and don't let a car payment steal your financial freedom. What a fun episode, Robert. It's just so important that people actually run the numbers and they actually understand this stuff. And I genuinely, who dreams about having a car payment for the rest of their life? I'm just the type of person that's like, I want to own it.

21:07It's mine. I can do whatever I want with it. I don't owe anyone anything on my stuff. I think faster people can come to terms with, sure, you have a lower lease payment in the short term, but you're always going going to have a lease payment versus, okay, I have a larger monthly payment on buying, but I know in five years I won't have a payment at all. And I'll have eight, 10, 12,$14 ,000 of a value in this asset. It's just so easy to connect the dots there, but people don't do it. Well, we say personal finance is personal. I always have a lease payment because I don't like friction. I'm a really busy guy, but the average person, I love it.

21:45They should buy, buy, use, drive it to the wheels fall off. Keep it maintained well. Really, that's just tires, brakes, and oil changes for the most part because cars are lasting a lot longer. And they're holding equity pretty well now as they get older, especially the Toyos and Hondas. But personal finance is personal. Do what works for you. And the main goal here is to make sure you understand the difference and you understand the numbers so you can make an educated decision. Yeah, I appreciate that call out, right? Because it's like you lease every three years, but it's like, who cares? You're rich, right?

22:18It's like, I can do whatever I want with the money. I make it, right? And so it's like, yeah, if it doesn't matter what choice you're making, what matters is you are going into making that choice with your eyes wide open and you understand what you're doing, right? If you're like, yeah, I'm going to lease a new car every three years because I can afford it. It's like, cool. You work hard for your money. Do what you want to do. But if you're the average American with a household income of like 75 grand and you've got, you know, two kids and, you know, parents and you guys are trying to make ends meet and want to build wealth over a long period of time, the average American should not be leasing a vehicle.

22:52The average American should figure out how to one, buy a used car, right? And then two, after they buy that used car, pay it off and then invest the difference that would be car payment on public.com, build their wealth and just don't have so much money on this like payment treadmill. I never heard it described like that until we were doing some research into this episode. It's really what that is. It's like a payment treadmill you're never going to get off of. I'm never going to forget that statement. That's for sure. All right, y 'all. So now let's jump to the Q &A section of this episode. As a reminder, you can ask us questions on Instagram via Instagram DMs at richhabitspodcast.

23:25You can email us questions at richhabitspodcast at gmail.com. Or you can join the Rich Habits Network, which is our community for our biggest fans of the show. We have over 800 people right now inside of the Rich Habits Network, and they always get their questions answered because Robert and I, every Tuesday evening, host a two-hour live stream where they can ask us questions face-to-face. Turn on your camera, say, hey, what's up? My name is Rebecca. Here's my question. So check out the Rich Habits Network. So our first question here, though, is on Instagram, and it comes from K.A. K.A. says, hi, guys.

23:57I need the matter kept very anonymous. Okay, so K.A. I feel like it's a pretty anonymous acronym here. K.A. says, I did the worst thing anyone can do. I over leveraged in a Robinhood margin account and the few stocks that I thought were going to be rock stars all tanked. RIP to all my savings that Robinhood has now automatically sold to cover their own loss. I was willing to oo saw this out and wait until 2026, but Robinhood sold everything. I'm not sure what to do, where to go from here. Please help. I still have$30 ,000 in a crypto account on Coinbase,$20 ,000 in my checking, and I have my retirement accounts.

24:35but I'm at a loss for words for how this happened because I was just up$100 ,000 in this Robinhood account in September. Now it's all gone. God, help me through this. What do I do? Oh man, K.A. Well, first off, I'm really sorry to hear that you're having to learn this lesson the hard way, my friend. We always tell people to avoid going into debt to invest. And unfortunately, ultimately Robinhood makes it very easy for people to take on debt to invest. So here's, I'm thinking what sort of happened and Robert, correct me if I'm wrong, but KA, let's say, had an account worth a quarter million dollars.