The most common question I get asked after “What’s your favorite car?” undoubtedly is “should I buy or lease my car?” The answer? To quote my most entertaining school professor Ramon Febus “It depends.” In this article, I’ll attempt to go over the factors that influence buying versus leasing. While I don’t claim to be an expert on finance, I have looked at long term cost of leasing versus financing in many cases, and can give you some advice on how to make the right decision.
The first important thing to note is that many manufacturers heavily subsidize lease specials to help increase sales volume. In essence it means lease prices are incredibly low for the car you are getting and pretty difficult to beat. This article assumes that the car you’re looking at is somewhat mainstream and has some lease special available. Some companies, Porsche in particular, really don’t subsidize leases to speak of so most of this may not apply to certain manufacturers.
1) The myth that you should always own a car
I’ve heard a lot of people say you should own a car, not lease it. In most circumstances, cars a pretty poor investment (Aircooled 911 owners, please don’t email me about how your cars appreciate, you’re in the minority). They depreciate with mileage, they depreciate with age, and heaven forbid you get into an accident and dirty that oh-so-valuable clean carfax report, they depreciate from that too. For the majority of the population, cars are simply a transportation method and nothing more. If you want to modify your car extensively, buying is usually a better move, I will say that.
The idea that you somehow gain something from owning a car vs leasing (or essentially renting a car for its depreciation) is a bit farfetched. Typically most leases have gap insurance built in, and in my case gap insurance on my Mazda 3 was $7 a month. (Gap insurance will pay for the difference of your cars value and what you owe if it’s totalled) There are some tax savings for businesses with leases, but talk to your accountant or lawyer about that. I’m a journalist, not a financial advisor.
2) Shop around!
You don’t even have to get out of your seat to do it. I’ve seen many people go into a car dealership and sometimes pay $200 more to lease or finance a car than the nationally advertised lease or finance special. Do yourself a favor and go to the vehicle manufacturer’s website and check for lease or finance specials: often times they can save you tons of cash and headache, and even guarantee you a lower finance rate. Keep an eye out for manufacturer incentives as well. The other pro tip I can give you is that many companies drop their lease rates significantly when you put down multiple security deposits. It ensures that you won’t duck the lease and run, and can get you up to $100 a month off in some cases. BMW and Lexus both have aggressive discounts for multiple security deposits.
3) Accidents happen
If you get into an accident on a car you own, it will affect the value of your vehicle, just like a new car, and unlike a lease. This is especially important if you’re somewhere like Miami where someone is far more likely to check their text messages than their mirrors. With a lease, as long as you repair the car properly, there usually isn’t a penalty for previous damage. (Some leases require original equipment parts, some allow aftermarket. Use a reputable body shop either way) Most leases also give you an allowance of a few dents or scratches per panel on turn in as well. If you’ve ever tried to sell a used car, you know how problematic those small issues can be.
4) Slightly used cars have taken the bulk of their depreciation so they’re a better value
In some cases, yes, you can get a great 1-2 year old car for a good price from a dealer, however if you factor in finance rates, future depreciation, and even the interest your money could be making when not being stuck in your car, you may be surprised to see that a solid lease is potentially cheaper than many cars over the long term. Even people who keep their cars for a long time still don’t necessarily save over leasing.
5) Do the math!
It’s pretty easy to get a rough idea of how much money you’ll actually spend on a car. While this isn’t precise and doesn’t take into account finance rates and other things, it’s good to get an really basic idea. Let’s assume you want Car A and there’s a good lease rate on it:
2015 Car A Lease: 36 months, 36k miles a year, $200 a month, $1000 due at signing not including first payment. (You’ll get your security deposit back, so that’s not included either)
36 Months x $200 a month= $7200 total lease payments, + $1000 inceptions= $8400 total spent for 3 years 36k miles.
2015 Car A purchase: $20,000 outright
2012 Car A value with ~36k miles: $12,000
$20,000 (new price) – $12,000 (used price)= $8000 depreciation
*Avoid large down payments on leases. They are not a security deposit and you will not get them back in case of an incident.
So we can see here that the approximate cost to use car A on a lease is $8400 spent, and buying Car A to use for 3 years will cost approximately $8000. So it’s better to lease? Not so fast. Consider finance rates, and if you’re not financing, the opportunity cost of what you could do with that $20,000 instead of driving it around depreciating it comes in to play. The same can be done with used cars, but you just need to keep in mind that repairs and upkeep will be a variable expense when out of warranty, and you may need to get a rental car or alternate transportation if something breaks, and you will need to go through the trouble of selling your car at the end.
The other thing to keep in mind is that a lease can be a kind of extended test drive. If you like the car and it’s financially right for you, you can always buy the car out at the end of the lease and usually be in better shape than if you financed. Think of a lease as essentially paying interest on the depreciation of the car rather than the principal value of the car. The number one tip for leasing vs financing is know the numbers. Find out EXACTLY what interest rate you are paying regardless, and go into things informed. Dealers by and large are in business to sell cars, and will do so making more profit if possible.
All in all, the only way you can see whether to buy or lease is right for you is to do the math. With heavily subsidized lease rates and the knowledge that in that 3 years you will always have a car (provided your manufacturer gives loaners) and your operating costs will be more-or-less fixed, I’ve seen more and more cases where it’s better to lease than finance, even in cases where someone keeps a car for a long time. For most cars I’ve seen the breakeven point come at around 6-8 years for leasing vs financing, (to be clear, that means leasing the same model car multiple times, getting a new one each time, not a 6-8 year lease, thanks Nick!) and at that point you have a 6-8 year old car and will need to start tending to it’s needs. Both have pitfalls and benefits, but I figured I could shed some light on how to do some basic math to see which method is right for you. As usual, if you need specific help or have a question, drop me a line. Enjoy!