Is it irresponsible for me to lease a $300/month car for 18 months?

Question

Here's my financial situation.

My net worth not including student loan debt is about 4.5k. I make 95k a year but end up getting about 4k a month (after retirement saving, health insurance, etc). My rent costs 385/month, other major expenses include 200/month for health stuff, 225/month for gym, and the rest are just expenses like bars, entertainment etc.

I'm trying to pay off my student loans in a year a half, I have 26k worth of student loans.

I bought a used car for 5k in the summer and had a lot of problems with it and it's now totalled, I found a great lease deal for 300/month. Is this responsible considering my income and debt?

Answer 1

With a gross income of $ 95,000 per year, and a net savings rate of over $ 18,000 per year, a budget of $ 3,600 per year for automobile interest and depreciation is not irresponsible.

But poor car choices, poor car maintenance habits, and driving habits that risk totalling cars are irresponsible. Also, not fully understanding a lease deal is irresponsible.

The "great lease deal" might be encouraging you to make a different "poor car choice" than you made last time. A "great deal" on a bad car is not really a great deal. Also, depending on the contract and your driving habits, you might have a surprising cost at the end of the lease.

Answer 2

Some questions:

Will you need a car after 18 months? What are you going to do then?

How likely are you able to go over the mileage?

Granted paying $300 per month seems somewhat attractive as a fixed cost. However lease are notorious for forcing people into making bad decisions. If your car is over miles, or there is some slight damage (even normal wear and tear), or you customize your car (such as window tint) the dealer can demand extra dollars or force you to purchase the car for more than it is actually worth.

The bottom line is leasing is one of the most expensive ways to own a vehicle, and while you have a great income you have a poor net worth. So yes I would say it is somewhat irresponsible for you to own a vehicle.

If I was in your shoes, I would cut my gym expenses, cut my retirement contributions to the match, and buy another used car. I understand you may have some burnout over your last car, but it is the best mathematical choice.

Having said all that you have a great income and you can absorb a lot of less than efficient decisions. You will probably be okay leasing the car. I would suggest going for a longer term, or cutting something to pay off the student loans earlier. This way there is some cushion between when the lease ends and the student loan ends.

This way, when lease turn in comes, you will have some room in your budget to pay some fees as you won't have your student loan payment (assuming around 1400/month) that you can then pay to the dealer.

Answer 3

Presumably you need a car to get to work, so let's start with the assumption that you need to buy something to replace the car you just lost. The biggest difficulty to overcome in buying a car is the concept of the monthly payment. Dealers will play games with all of the numbers to massage a monthly payment that the buyer can swallow, but this usually doesn't end up giving the customer the best deal. The 18 month term is not normal for a lease, typically you'll see 24 or 36 months. You are focusing on another goal of paying your student loans by then which would free up much more money for other wants (like a car) but at what cost?

The big difficulty of personal finance is the mental mind game of delaying gratification for greater long-term benefit. You are focusing on paying your student loans now so that you can be free of that debt and have more flexibility for the future. Good. You're tempted to spend another $5400 (assuming no down-payment or other surprise fees) to drive a car for 18 months. That doesn't sound any wiser than $5,000 for an unreliable used car that gave you more problems than you bargained for. Presumably you got some percentage of that money back from the insurance company when the car was totaled, but even if not, the real lesson should be finding a car that you can afford up-front, but also one that you can still use when the loan is paid off (like your education--that investment will keep giving even when the loans are a distant memory).

My advice would be to look for a car that has about 30k miles on it and pay for it as quickly as possible, then drive it at least for 70-120k more miles before replacing it. You may wish for a newer car, especially in 3 or 4 more years when it starts to show its age, but you'll also thank yourself when you can buy a newer better car with cash and break out of the monthly payment game that dealers try to push on you. You might even enjoy negotiating with car salesmen when you see through their manipulations and simply work for the best cash price you can get.