Should I Buy or Lease a Car?
It’s a common question asked by many. Should I buy or lease a car? Different interested parties will have differing opinions. Let’s look at it from a disinterested financial planning perspective. We will begin with the pros and cons.
Leasing Pros & Cons
Pros
Cons
Buying Pros & Cons
Pros
Cons
Yes, leasing a vehicle is more expensive! Even while researching this podcast for figures I found articles (buy auto dealers, naturally) that stated that leasing a vehicle is cheaper. So which is it? Let’s break down the math.
The Math – Which is More Expensive?
We know the cost of buying. We looked at that in our used versus new analysis. Let’s look at the cost breakdown of a lease.
We must divide the due at signing payment across the lease period. If $3,600 is due at signing on a three-year lease, that’s effectively adding $100 per month to the monthly payment.
On a $40,000 vehicle (assuming you have good credit), your payment would be $479, and with the extra $100, that’s $579 per month. That adds up to $6,948 per year with no overages. If you go over your miles (usually 10,000 to 12,000 miles per year), it will cost you $0.15-$0.25 per mile. Going 3,000 miles over all three years could easily cost you another $1,800 when you turn in the vehicle.
Let’s compare the two over a typical three-year lease period. Be sure to listen to the podcast for the full commentary.
| Buy Car | Lease Car | |
|---|---|---|
| Monthly Payment | $720 | $579 |
| Total Payments (3yrs) | $25,920 | $20,844 |
| Vehicle Sale Value | $24,000 | $0 |
| Loan Owed | -$16,700 | $0 |
| Net Sale Value | $7,300 | $0 |
| Total Vehicle Cost | $18,620 | $20,850 |
| Lease Premium | $2,230 |
It could cost $2,230 more to drive the same vehicle under a lease, and that’s without any overage charges.
But what about opportunity costs! There is $140 per month that we save by leasing a car. Couldn’t we invest that monthly savings, like we did when we compared buying new and used?
Yes, we could. But even if you averaged 10% over a three-year period (which is not long enough to bet that we would), you still would only make about $800 in growth. You are still paying about $1,400 more to lease the same vehicle.
Further, the first vehicle you buy has the highest monthly cost. After that, you can roll the sale price into the next one. The second vehicle would cost you about the same per month as leasing the next one. And the third vehicle will cost less, even per month, than leasing.
| First Car | Second Car | Third Car | Lease Car | |
|---|---|---|---|---|
| Financed Amount | $40,000 | $32,700 | $29,650 | $40,000 |
| Monthly Payment | $720 | $586 | $531 | $579 |
| Total Payments (3yrs) | $25,920 | $21,096 | $19,152 | $20,850 |
| Vehicle Sale Value | $24,000 | $24,000 | $24,000 | $0 |
| Loan Owed | -$16,700 | -$13,650 | -$12,380 | $0 |
| Net Sale Value | $7,300 | $10,350 | $11,620 | $0 |
| Total Vehicle Cost | $18,620 | $18,050 | $17,880 | $20,850 |
| Buy Discount | $2,230 | $2,800 | $2,970 |
Each successive vehicle we buy is cheaper than its equivalent lease.
All these numbers change. You could make more or less of the sale of the purchased vehicle. You could go over your lease miles and add hundreds or even thousands of dollars to that expense. But in most real-world scenarios, leasing is more expensive than buying.
Why Would Anyone Lease?
The primary reason people lease is they don’t understand the math. They read articles written by car dealers that deceive or car enthusiasts that are naive that assert leasing is cheaper. It is not. Leasing is more expensive than buying. Always.
People also get sucked into the hassle-free nature of leasing. Maintenence is covered. It’s not going to break down on you. It’s easy. But all those features also apply to buying new. It is a new car feature, not a leasing feature.
But there is the hassle of selling. Some people believe that having to buy and then sell a vehicle is more of a hassle than simply leasing one and turning it in. And perhaps it is. Would you pay yourself a few thousand dollars (in savings) to sell your vehicle? Some people wouldn’t. Their time is too valuable.
How long does it take to sell your vehicle? A few hours of posting and showing it? 10? 20? And if you’re saving $2,000-$4,000 by buying instead of leasing, how much are you earning per hour to sell your own vehicle? $200 per hour? $400 per hour? Some people make more than that in their work. For them, leasing may even make financial sense. But that’s not most people.
If you really hate spending time doing that, I’m sure you know a car enthusiast you could pay to sell it for you. “I’ll pay you 2% of the sale price to sell this car for me.” If you’re trying to get $24,000 for that vehicle, you’ll pay about $500 to get it sold. That’s still a big saving, and with no hassle.
Bottom line: You should buy, not lease.
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.
