Is it better to buy or lease a car? This is one of those evergreen questions and strangely, it’s not as clear cut as you might think.
Buying a car is a huge purchase for most people. We already talked about how crazy it is that someone can agree to pay $20,000 for a depreciating asset that will lose up to 20% of its value in the first year of ownership. Add in the fact that most cars spend 90% of their life in a parking spot and it becomes hard to justify spending huge sums of money on a new car. Buying a car is not an investment. I would say buy used, but for the sake of simplicity we won’t consider used vehicles in our analysis.
Buying and leasing both have advantages and disadvantages.
When you buy a car, unless you are a baller, then you are probably going to buy a car loan. Each payment you make builds equity until finally, 3-5 years later, the car is yours.
When you lease, you are making monthly payments on a car that you don’t necessarily intend on buying. You are basically renting a car.
Here are some factors to consider when deciding whether to buy or lease a car.
Your Monthly Payment
In both cases, whether you buy or lease you will be making a monthly payment.
Leasing often comes with a lower monthly payment compared to financing a car with an auto loan. That’s often how people get drawn into leasing a car in the first place. Prices are often quoted per week to make them seem even more enticing.
$60 a week for a brand-new Volkswagen Jetta? Hard to say no to that!
If you were to finance the $17,000+ Volkswagen Jetta your monthly payment would likely be in the range of $400/month.
So the car loan monthly payment is $400+ a month and the lease is around $240 a month. If you need that extra money every month then maybe leasing is the right option for you.
The Down Payment
It’s rare that you can buy or lease a car without putting some money down. It is possible but perhaps counter-intuitively it’s in your best interest to make a down payment.
The bigger your down payment the smaller your monthly payment will be, and the cheaper your car will be in the long run.
Does that make sense? Because you’re taking a big chunk out of your payment at the beginning there’s less money to pay down and as a result, you pay less interest on that money.
Some dealers may let you walk out of their dealership with a brand new car and no money down. That is a trap, and you can quickly go upside down on your purchase.
A car loan goes upside down when you start to owe more than the car is worth. This is best illustrated the moment you buy the car. Imagine you buy a $20,000 Nissan. As soon as you drive the car off the lot, you owe the entire loan: $20,000, but the car has already dropped in value and is only worth $18,000. You now have negative equity.
In the first 3-5 years a car will depreciate some 40% and if you don’t make a down payment then it becomes very hard to keep pace with that sort of depreciation.
Leasing a car also requires a down payment, but is typically less than the down payment when you purchase a car. For example you might put down $2000 to lease that Nissan, versus $3000 if you tried to buy it.
This is the one factor that most people fail to take into account. Buying a new car can feel liberating and, if it’s your first one, like a rite of passage; however, the price of the car is not the price of the car.
There are many hidden costs that go with operating a car. There are the obvious ones, like car insurance and gas. Car insurance can run in the range of $1000 a year. Depending on how much you drive, your gas costs may range from $1200-1800 a year.
Add that all up and you’ve already got an extra $150 a month on insurance and gas costs, minimum. This is true whether you buy or lease a car.
Does your city require you to register your car and license every year? That’ll be another $200 a year, thank you very much.
What about maintenance? Popular car site Edmunds estimates the 5-year maintenance cost for a 2015 Honda Civic at nearly $3000, or an average of $600 every year.
Oh, did you get the extended warranty when you left the dealership?
How would you like to pay for that?
By the way, don’t forget the dealer prep fees and sales tax. You know what, just leave your wallet; I’ll take out what’s needed.
These are the costs that aren’t even that hard to decipher. The joke is that when you buy a car you’ll get charged for things you’re not even sure exist.
If you lease there are additional invisible costs. Some dealers stipulate mileage restrictions. Drive more than a certain number of miles a month or year and you get charged a fee. When it’s time to return the car, if the dealer assesses it and determines that there has been “above-average” wear and tear (whatever that means), then you’ll be hit with – you guessed it – a fee.
Buy or Lease?
So which side is the winner?
To be honest it’s not exactly a like-for-like comparison.
Financially, a car is always the cheaper option over a long period of time. If you buy, at some point you will own your car and your costs will come down.
Often leasing a car comes down to a lifestyle choice. There are people who like to drive a new car, and because the individual payments are less than when you buy a car, lessees are able to drive nicer cars than if they had to buy. Maintenance costs are also their lowest in the first three years of a car’s life – which is what a typical lease runs for – and most warranties tend to last that long.
To make the choice between buying and leasing comes down to what’s best for your lifestyle.