For most Americans, the cost of owning a car (or cars) falls second only to maintaining housing expenses. Generally, you’re left with either buying a vehicle (new or used) or leasing. While leasing is often considered the most expensive decision over time, there are many happy drivers who wouldn’t think of buying a car. They enjoy “trading up” every two or three years because they appreciate driving new vehicles with the most up-to-date features. This type of behavior is largely why owning a vehicle can make you poor.
For some drivers, the nature of their job demands providing luxury transportation to important guests or clients. Furthering their career may require maintaining a certain status, and driving a new vehicle is one visible way to demonstrate personal success. However, many people choose to lease their vehicles simply because they can afford the extra amenities.
Conversely, for the less-affluent, leasing allows them to drive a more-expensive vehicle than they could afford to purchase outright. And compared to older used vehicles, if you lease, you get a new car with a warranty so maintenance expenses are greatly reduced. When it is time upgrade, you can simply turn in one vehicle for another. Trying to sell or trade a purchased vehicle as part of the buying process can be avoided completely.
Leases Aren’t Necessarily Cheap
Financially, some lease programs offer lower monthly payments than traditional new car purchase agreements. Essentially, you are paying a reduced sales tax, a program finance charge, and only a portion of the cost of the vehicle, which is its depreciation value. A large down payment is sometimes unnecessary, but varies by lease. When used for business purposes, many lease expenses can be written off on income taxes. There is also some room for negotiation when deciding on a leasing company and a particular vehicle.
Of course, not all leases are created equal. Some dealers may lure you in with an advertised low monthly payment, but when you get into the fine print you might realize that you must pay thousands up front and the mileage allocation at that price is simply impossible to stay within.
Although car leasing may or may not be less expensive up front, there are other considerations that can affect the total long-term costs. For example, most leasing programs have strict mileage limitations and costly penalties for exceeding those boundaries. The typical agreement holds the driver to 12,000–15,000 miles per year. Also, it is assumed that the car will be kept in “like-new” condition and not exposed to extreme wear or tear. Failure to do so can result in additional fees that can easily amount to thousands of dollars.
Terminating the lease before its natural expiration usually creates another expensive penalty. Additionally, drivers are expected to maintain all the normal care, maintenance, repairs and insurance on a leased vehicle as they would on a purchased one. And finally, insurance rates are higher for newer luxury vehicles, and gap insurance is recommended.
Is Leasing Right For You?
Leasing a vehicle is much like renting an apartment, and the strongest argument against this decision is the fact that at the end of the contract period, you have nothing to show for all those months of payments. Furthermore, closed-lease agreements do not allow buying the vehicle after the lease period has ended. While open-lease agreements will permit a buy-out of the car at its depreciated value, the overall long-term investment may be more expensive than buying the car new in the first place. Since cars depreciate the most during the first three years, leasing is definitely more expensive than buying a slightly older, used vehicle.
Buying a new car is also an expensive prospect, but it’s certainly a long-term commitment. If you purchase a vehicle and decide two years from now that it no longer suits your needs or you need something else for whatever reason, you’re probably going to take a hit. The vehicle is obviously worth less than what you paid for it, you’ve been paying interest on the auto loan, and especially if you trade it in at a dealership, you’re going to take a financial hit.
At the same time, purchasing also gives you the flexibility to keep a vehicle for as long as you’d like without paying an early termination penalty, and if you sell when you own the vehicle outright, that’s cash in your hand.
For those who know they will be putting excessive miles on their vehicle or subjecting it to additional wear and tear, buying is more cost-effective than leasing and facing prohibitive over-use penalties. When a purchased vehicle is paid-off, the owner can choose to maintain the vehicle and avoid monthly payments for years. The idea of owning and “driving a vehicle into the ground” has some sound financial reasoning behind it.
Ultimately, the decision to buy or lease a new vehicle comes down to your specific needs. From a strict financial standpoint, when you compare buying vs. leasing an identical vehicle and keeping them for the same length of time, buying will almost always win. And when you compare leasing to buying a slightly used vehicle, there’s no question buying will save you money. But if you’re someone who needs, or even just wants a new vehicle every few years and can stay within all the lease limitations the case can certainly be made for leasing over buying.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.