Buying or Leasing

I’ve always assumed that leasing a vehicle was a worse deal that buying otherwise, why would dealerships offer it as an option, but I thought I’d take a look at some other (more informed) opinions on the subject.

Advantages:

  • One benefit, that I don’t value very much, is the ability to drive nicer vehicles and trade in to a new vehicle more often. Leases payments are cheaper for equivalent vehicles, which is the draw, but alternatively, you can spend the same amount of money and lease a nicer car.
  • Also, you have to turn in the vehicle at the end of the lease, so you (probably) get a new vehicle each time the lease ends.
  • Maintenance costs are also lower for leased vehicles because the car’s warranty is usually still in effect.
  • Leasing usually doesn’t require as large of a down-payment, meaning you don’t need to have as much cash on hand to lease a car.

…and that’s about it for the benefits. On the other hand, there are a number of disadvantages to leasing including:

  • Usually you have to pay higher insurance costs because you have to pay gap insurance that covers the difference between the what you owe on the lease if the car is totaled.
  • You don’t build equity on a leased car. This was my instinct and it turned out to be correct. At some point, you stop owing on a car you purchase and can trade it in, sell it, or simply drive it without paying a monthly car-note. Over longer periods of time, the initially cheaper lease stops paying off because of the continued monthly payments and because you give the car back just as the lion’s share of depreciation has finished eating away the vehicle’s value.
  • Fees! Mileage fees, wear-and-tear, and dealership fees all can start to add up. These fees need to be paid at the beginning of each new lease.

Leasing doesn’t seem like the right decision for me, but it’s a personal decision that each individual needs to make based on their lifestyle and financial situation. Edmunds.com estimates that right around 5 years, assuming you renew you lease after 3 years and that you financed the same car for 3 years, buying becomes the cheaper option. This calculation includes insurance, maintenance, down payment, monthly payment, taxes, fees, and interests.

Source: http://www.marketwatch.com/tools/carleaseorbuy

2 comments to Buying or Leasing

  • Kuangdi Zhao

    When comparing leasing with purchasing, we also need to consider the present value of the sum of payments. Present value allows us to compare the cost of leasing in today’s value with the cost of purchasing. Interest rate can significantly influence the cost of leasing in today’s value. For example, With an APR of 6.0% and monthly payment of $1000 lasting 48 months, the present value of these payments is $42580.32. With any APR of 2.4%, the present value of the same payments is $45724.4. Therefore, high interest rate makes leasing more attractive.

  • Leasing is better with vehicles that have high resale values, as that lowers the monthly. If you don’t drive more than the standard lease allowance, again it’s more attractive. Now you don’t gain equity, but with new car loans of 60-72 months lots of car purchasers NEVER are above water on their car, so in practice this is less of an issue than it might seem.
     
    The present value calculation that Kuangdi posits, however, likely does not hold in practice. In his calculation he assumed that the monthly payment doesn’t depend on the interest rate. But the monthly payment is the amount needed to pay off the finance amount [purchase price less end-of-lease residual value] at the market interest rate. That payment rises with the interest rate. Now there is a depreciation component, so potentially a lease can be offered at an interest rate below regular market rates and still leave a profit for the leasing company. But there are also state-specific factors, such as whether there’s a sales tax on a lease, that can make leases much more attractive. I don’t know which states work things which way, but I do know that this is why leases are much more common in some states than in others.

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