Lease vs buy

Maintenance/Repairs
61

“Overall, yes, we’re paying more for vehicles by continually getting a newer one (either leasing or buying them) every 2-3 years, but our lease payments are about $150 less/mo. compared to buying (saving about $1800/yr. in payments). It’s very difficult to trade in or sell a 2-3 year old vehicle for what is owed on it at that time.”

As I said to the other posters, you should do what you want. It does sound like you are aware that you are comparing two very costly options, either way you are eating all the new car depreciation and selling a nearly new car to someone else who is getting a very good deal compared to yours. IMHO, you are also assuming quite a bit of risk to “save” $150 per month. You are essentially renting a mid-priced truck for $500 per month, I’m also assuming that you gave them the old car for what you still owed (they will probably make another $3-4000 on that end of the deal). I hope your car dealer sends you nice christmas cards.

I honestly don’t understand why folks feel a need to replace a 2-3 year old vehicle. Current vehicles are very reliable well past that point, and should look, feel, and drive like new. I do remember when the life expectancy of a (domestic) car was about 100K miles and many folks traded them every 2 years. My grandfather (the stereotype self-made businessman) used to trade in caddies every 1-2 years in the 60s, I don’t think he even bothered to change the oil. At least those old caddies changed from year to year, now I can’t even tell the difference between model years of most cars. To me, this is sorta like living in a nice hotel full-time to avoid the hassle of owning a house (at twice the cost, with no equity gain). My wife might like that idea, but it’s not going to happen.

I can understand why some folks choose to buy new (not used) cars, but that only begins to make sense if you keep the car for much longer that 2-3 years. If I (or my wife) wanted to drive late model cars, we would buy 2-3 year old used cars and keep them for 3-5 years (depending on mileage). For $500-700 per month, I could drive MUCH nicer cars than the ones you are buying simply by buying 2 year old vehicles. I could also drive equivalent vehicles for closer to $300 per month and put the other $200-400 in the bank (in reality, I would only pay cash for cars). If you put that car payment difference in a decent mutual fund for 10 years, you will probably have $50K in equity (probably more). You need to decide if driving a 0-2 year old car (instead of a 2-4 year old car) for the next 10 years is worth $50K to you. Just something to think about.

62

I haven’t taken a loan out for a car in OVER 20 years…And I DON’T buy used cheap cars…It’s fairly easy to do…Buy a cheaper car when you’re young…After the loan is paid for…keep it another 5 years…but keep making payments to a savings account. Then when you’re ready to buy a new car you have this savings account to either buy a new car similar to what you just had…or step…but take out a smaller and shorter loan…Then do it again…

If you buy a new car every 3-4 years you are buying on emotion…finances are NOT part of your decission.

63

It is only better to lease a vehicle if you are a business and the expense is a tax write-off. Otherwise, you may as well burn your money and walk.

64

I knew a couple who did both. The wife leased; the husband bought.

The husband maintained his cars and drove them forever. The wife was less careful, and her cars would be in rough shape after a few years. They made peace by keeping their cars (and habits) separate, which also meant that neither got their spouse’s hand-me-downs.

Every three years, they’d trade in the wife’s car for a new one. She’d pay the extra reconditioning fees and would walk away from the accumulated damage and into a nice, new, reliable, safe car.

Of course leasing cost them more money, but they were happy together and didn’t have to argue about cars.

65

There are a lot of blanket statements in this thread, few with explanations, and some with plain misinformation.

I’m not a banker, a dealer, or a financial advisor, but I can operate a calculator, and do have some experience with buying (both cash and borrowing) and leasing vehicles. It’s really not as simple as ‘such-and-such is always a waste of money’. It’s situational, depending on the buyer’s finances, plans, and driving habits, the vehicle in question, and lease and loan rates from to month to month.

Let’s take a 2008 Honda Accord as an example. Suppose you buy one for $25,000, and drive it 15,000 miles a year. 3 years and 45,000 miles later, it’s worth about 60% of the purchase price, or $15,000. I think this is a reasonable estimate, give or take, depending on the trim and options, how well it’s maintained, whether you trade it in or resell privately, and so on. This is also the published depreciation per American Honda Finance for the month of January.

Let’s assume sales tax is your state is 5%. For the sake of simplicity, we’ll ignore delivery, title, documentation fees, and the like. They’re not really relevant here anyway.

CASH PURCHASE
If you paid cash for the car, you wrote a check for $26,250.
26,250-15,000 = $11,250 net loss.

LOAN
Figuring a moderate down payment of $7,500 and a 36-month term at 6%, your monthly payment would be ~$570. At the loan’s maturity, you’ll have made $20,520 in payments. You’ve paid a total of $28,020.
28,020 - 15,000 = $13,020 net loss.

LEASE
We’ll assume the same 6% rate (expressed as a money factor of .0025), and no down payment. Now with leasing, you’re only financing the car’s depreciation – the portion of the car that you’ve ‘used up’, which we’ve already determined is 40%, or $10,000. This is also the only portion of the car on which you pay tax.

The formula to determine the payment is as follows. There’s a whole lexicon of leasing terminology, some of which I’ve substituted for simpler terms in the interest of brevity.

(Purchase Price - Residual Value) / Term = Base Monthly Payment
(Purchase Price + Residual Value) * Money Factor = Lease Fee
(Monthly Payment + Lease Fee) + Sales Tax = Net Monthly Payment

So…

(25,000 - 15,000) / 36 = 277.78
(25,000 + 15,000) * .00255 = 100
277.78 + 100 = 377.78 * 1.05 = 396.70/month

Since you’ve built no equity, the sum of your payments is your net loss: $14,281.

To summarize:
Cash: $11,250
Loan: $13,020 (+1,770)
Lease: $14,281 (+3,031)

In this scenario, cash is the cheapest option – no surprise. It usually is.

Now let’s assume more appealing rates are available. A promotional rate offered by a manufacturer’s captive finance source might be about 1.9%. Without showing all the math again, the costs would break down as follows:

Cash: $11,250
Loan: $11,804 (+554)
Lease: $11,695 (+445)

Borrowing or leasing is much more appealing now, especially if you can’t (or just don’t want to) crack a check for $25k.

Of course that’s not the end of the story. Interest rates on loans obviously fluctuate a great deal. Money factors and residual estimates for leases vary greatly from vehicle to vehicle, and bank to bank. Some loans will cost the buyer little more than an outright cash purchase; some will cost substantially more, particularly if the buyer has little or no down payment, or weak credit. Sometimes leasing is a better option; sometimes it’s the worst. Sometimes it can even be cheaper than buying if the the rates are low and the residuals are overestimated.

The blanket statements are not helpful, and moreover, are not true. Find the vehicle you want, consider the rates and incentives available to you, consider your driving habits and how long you expect to keep the vehicle, and do the math. If you keep your vehicles a long time and put a lot of miles on them, buying is usually the best option. If rates are low, and/or your down payment is substantial, financing the purchase may not cost very much at all in the long run. If you put only moderate mileage on your cars, and would like to drive something new every 2, 3, or 4 years, leasing may be a perfectly good alternative, and in some cases even cheaper than buying. What’s more, all that cash you’re not tying up in a depreciating asset (such as a car) could actually make you money if were to put it in, say, a high-yield savings account.

I’m not endorsing one method or another. Just saying that cash purchases, borrowing, and leasing can all be perfectly valid and financially sound decisions, but each depends completely on a number of factors that the individual car shopper should work out for themself.

66

That’s a good analysis, but I do have one comment. If they are offering 1.9% financing on a loan/lease, they are really just hiding a price discount in the financing numbers. I can almost guarantee that a cash buyer could negotiate a similar discount and return the relative costs to your first set of numbers. If a dealer is offering lower than market interest rates, a cash buyer needs to get an equivalent discount or he’s leaving too much cash on the table.

Also, if you lease you will end up covering the cost of the sales tax too. If will be hidden in the lease numbers someplace. If you lease and end up buying the car at the end of the lease like I did once (stupid), you end up paying sales tax twice on the same car (really stupid).

67

The sales tax thing is only true in Texas. Illinois makes you pay the full sales tax once, but if you buyout at the end you don’t have to pay the sales tax a second time. The rest of the states tax the lease payments themselves and the buyout amount if you choose to buyout.

68

OK, the point is that you do pay sales tax when you lease.

69

Craig is 100% correct.

Those 1.9% financing deals are ONLY good if you pay near full retail on a vehicle. They don’t offer those deals if you only pay $500 over invoice.

70

No, he isn’t correct. The price of the car is negotiated with the dealer, not with the leasing company. A lot of dishonest dealers try to convince you that you have to pay the sticker price if you are leasing but this is completely false. The negotiated price of the car should not change based on the type of financing used. Once you have the negotiated price down you can choose between the different financing deals which can include leasing, cash rebates, and loans at low interest rates. The point is, as cnhart states, there are no absolutes in car financing. Even paying cash can be worse then financing the vehicle if you can get a better savings interest rate then the financing interest rate. You need to run the numbers for all of the options yourself and make sure you are picking the best option.

Here is my 2007 Toyota as an example. I leased it in September 2007 on a 36 month Toyota lease with no money down, these numbers are not exact but are in the ballpark.
Negotiated price (including Illinois sales tax, title, etc.) $32,000 (this was about $800 over invoice, couldn’t do any better since I wanted the exact car I got down to the color)
Residual price $15,786
Monthly payment $436

So, I take $438 a month and put it in a money market savings account that makes me 5% interest. In the end the lease costs me $482 (the actual numbers come our more around $350) but I make a lot more than that on the interest so I come out ahead.

71

“Once you have the negotiated price down you can choose between the different financing deals which can include leasing, cash rebates, and loans at low interest rates.”

That is exactly what I was saying, once you get the base price the same, you will still pay a significant premium for leasing, especially compared to paying cash. If it doesn’t work out that way, you payed too much and there was sill a better deal available for a cash buyer.

Your analysis completely ignores risk. By your logic, I should borrow money to invest in junk bonds if I can get a better return. If your analyses was correct the leasing company would be losing money on every deal compared to putting their money in your bank’s savings account. This isn’t complicated, it’s economics 101.

72

This isn’t true. And I wouldn’t suggest you discuss with a dealer how you mean to pay (cash/loan/lease) until after you’ve settled on a price. If they’re pushy about it, just say you’re undecided.

Besides, it’s the captive financing arm of the manufacturer, not the dealer, who stands to make money on financing. The dealer makes their money from the premium paid over invoice, holdback, incentives from the manufacturer, and mystery fees slipped into the paperwork at signing. But how you choose to pay doesn’t really matter to them – it’s all cash to the dealer.

If a dealer tells you a promotional rate or other incentive only applies if you pay MSRP, 99% of the time, they’re lying. Find another dealer.

73

“This isn’t true. And I wouldn’t suggest you discuss with a dealer how you mean to pay (cash/loan/lease) until after you’ve settled on a price. If they’re pushy about it, just say you’re undecided.”

I’m not sure we are talking about the same thing, I was simply pointing out that leasing involves both paying more money and assuming more risk. If that’s what you want to do, it’s your choice.

Just to be clear, I do not buy new cars (not a great deal even if you pay cash), and I do not borrow money to buy anything that depreciates in value (regardless of the terms). That’s what works for me, everyone should do what works for them.

74

Sorry, that was in reply to MikeInNH, but these forums thread replies strangely.

75

You really need to take a class in basic finance…You are completely fooling yourself if you think you’re saving money by leasing as opposed to buying.

76

If you frequently buy new cars (frequently = more often than one every 4 years) already, and you don’t drive too much, leasing may not hurt you terribly. However, I’d never lease a car because leases always have mileage caps, and it’s very costly if you exceed those caps.

If you do buy a new car, be very careful about the new 6 year car loans. Frankly, any car loan above 4 years is just asking for trouble. Unlike other investments, a car is always depreciating, from the moment you purchase it.

Consider a car a tool to live your life, and make the best choices for yourself from that perspective.

77

I was once offered a “lease with option to buy” the car at the end of the lease whatever the price will be negotiated at the end of the lease. I didn’t know anything about leasing, so I didn’t take it. Did I do the right thing?

78

I was looking at a dealership’s website and they offered a 108 month finance option.

79

It is always right to turn down a financial transaction you don’t understand. Especially one that obligates you to making payments.

80

Besides, it’s the captive financing arm of the manufacturer, not the dealer, who stands to make money on financing.

WRONG…The dealer gets MAJOR KICKBACKS from the financial companies on these so-called deals.

Leasing is just a very very stupid idea…great for the dealer…and finance companies…but lousy for the buyer. You are ALWAYS making payments…It’s nice NOT making payments.