A Suze Orman exclusive

Let's first talk about why leasing is such an ego stroker. As I just mentioned, it allows you to drive a car you couldn't afford to buy for yourself. And why is that important? Because you suffer from status-symbolitis. You want your car to be the talk of the office parking lot, or to turn heads at the stoplight. People, wake up. You are spending money you don't have, to impress people you don't really know. Where is the logic in that?

If you want a flashy car, you should be able to write a check for it. Not lease it, not finance it. That's just financial common sense. There's a reason they call them luxury cars; they should be for people who have the money to afford that luxury. If you need to lease a luxury, that's a pretty good sign you can't afford it. Actually, a lot of people who finance a luxury car can't really afford it either. I know there are plenty of folks who drive a $65,000 car even though their retirement investments are way too low, they don't have a sufficient emergency cash fund, and they aren't doing anything to save for their kid's college education. But hey, they sure look fine driving their status symbol. Give me a break.

Getting Rear-Ended When the Lease is Over
When you lease a car, essentially you are borrowing it from a leasing company for a fixed period of time. The most common lease period is three years, although four-year leases are popping up now as well. When the lease is over, you can either buy the car outright or turn it back in.

Whether you are planning on buying the car at the end of the lease or not, it is probably going to end up being a bad financial move. The sale price the leasing company will offer you is usually not a good deal. This price, known as the "residual value," can be inflated because of some financial sleight of hand the leasing company pulled off, under the guise of getting your monthly payment as low as possible, way back when you signed the lease.

So what do you do? You hand the car in at the end of the lease period. And that turns out to be really sticky too.

If you don't return the car in pristine condition, you are going to get charged some extra fees. Please explain to me who wouldn't have wear-and-tear on a car they drove for three years, especially if there were kids squirming and spilling in the back seat.

There's also the odometer issue. Most leases stipulate that only the first 12,000 miles a year are covered by the lease. After that you will be charged a per-mile fee, maybe 15 cents or so. Here's just one scenario to ponder. You lease the car and don't worry about the mileage because your office is four miles from your home. Now let's jump ahead one year. You decide to move, or you land a fabulous new job that's not as close to home. Your daily roundtrip commute jumps from eight miles to 30 miles. That means just to get to and from work you are going to run up about 7,500 miles a year rather than 2,000. That will leave you just 4,500 miles to live your life: run errands, go to the movies, visit your friends and family, take a road trip. And what happens if Mom or Dad becomes ill and you decide to make the 300-mile roundtrip trek home each week to visit them?

The point is that life is full of unknowns. Right? When you sign a lease you can't possibly understand where your life is going to be in six months or two years. Your lease doesn't care what happens in your future; it won't adjust to your changing lifestyle. And that can end up costing you big-time.

Let's say you end up averaging 13,000 miles a year. That will mean over the three years you will be 3,000 miles over the limit. That's gonna cost you an extra $450 when you turn the car back in. Overrun your limit by 2,000 miles a year and you will be forking over $1,000 when you hand in the keys. The car experts at Edmunds.com tell me that they estimate about 10 percent of leasers exceed their mileage allowance, and typically by a whopping 5,000 miles a year. At 15 cents a mile, that's going to be another $2,250 they owe when they finish a three-year lease. Hmm… I bet every one of them assumed when they took out the lease that they would never go over the 12,000 limit.

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.