Motley Fool Answers Mailbag: Is This Car Lease Deal a Good Idea?

In this segment of the Motley Fool Answers podcast, Alison Southwick, Robert Brokamp, and special guest Ross Anderson from Motley Fool Wealth Management look for the best set of answers for a young man trying to deal with multiple financial priorities: an upcoming wedding, a recalcitrant used car, and retirement portfolio that could use a boost. Might his cash-back trade-in lease deal be a good solution?

A full transcript follows the video.

This video was recorded on Nov. 7, 2017.

Alison Southwick: The next question comes from Matt. Matt writes: "I'm getting married in March of 2018." Aw! Congratulations!

Robert Brokamp: That's nice.

Southwick: "While I have no real room for other expenses, my car's A/C unit broke down. Just my luck. It will cost $1,000 to fix. Instead of getting it fixed, I'm looking for a new car. The trade-in value of my car is about $8,500. I have a deal in place where I put $4,500 of that down on a lease of a new car and then get $4,000 cash back. My monthly payments would be $195 a month. I'm thinking of taking this deal due to the fact that I'm getting $4,000 cash back which I could use toward my wedding.

"I'm also thinking of investing a portion of this cash in some stocks, probably about $1,000. However, I'm worried about leasing vs. buying. Help! Is leasing a dumb idea?"

Brokamp: A lot going on in that question, Ross.

Ross Anderson: There's a lot of moving parts. I actually like that there's a lot of moving parts, because I think that's what's making this a harder decision for Matt. Let's isolate his questions and take a look at them.

The first one we'll look at is the car. It never is fun to have $1,000 unexpected expense, but it certainly does happen. So on the car loan, what you're talking about doing is taking an asset of yours that has about $8,500 of value. You're going to give half of that away, or a little more than half of that away as a down payment. Then you're going to take on a payment of $195 a month, which I'm assuming is like a 36-month lease, so you're going to put out another $7,000 of cash on driving your vehicle.

And it sounds like you're doing that to get over a relatively short-term fix. So five months of payments is the same $1,000 that you're facing on the air conditioner right now, so to me that feels like you're robbing Peter to pay Paul a little bit in this case, and it kind of scares me.

The other component of that, though, is just, general, is leasing is a bad idea, and I don't think that it is, because a car is a depreciating asset. You're kind of treating it like an expense and you're just renting it for a longer period of time. So in general, I don't think leasing is a dumb idea, but I think with this situation, Matt, the short-term pain you're looking a, getting over it this way, I think, is going to lead you to a lot longer cash-flow drain.

It sounds like dealing with a cash flow situation. Getting yourself to a spot where you can put together an emergency fund and absorb that $1,000 fix, or the future things like that that come up, is going to be most important. I would try to look for some other places to skimp and not give away the $8,500 asset that you have, and try and get the car fixed.

Brokamp: Yeah, it sounds like he's just pressed for cash -- he's got this wedding coming up -- but to put a $1,000 repair on the car, as opposed to doing this other thing where he gets some money back, it's a short-term fix. If he can find some other way to cover those costs, that's his better bet.

Anderson: Even if he invests $1,000 of it you're taking an asset, now, of $8,500. You're going to spend all of that except for $1,000. A thousand dollars invested is a great thing, but it's not going to make back the money that you have today in value very quickly.