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

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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?

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A full transcript follows the video.

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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.

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