I’ve never leased a car, nor have either of my parents. We simply don’t believe in it. I’m fortunate that my husband agrees. I do have friends who lease, though. I ran the numbers to compare the costs. Which is better: leasing or buying a car?

Arguments for Leasing
I polled my friends who lease and these are their reasons:

  • A car is not an investment
  • They’re able to drive a nicer car than they can afford
  • They don’t have major maintenance costs.

I can see the point of some of these arguments, but I have some counterarguments:

  • No, a car isn’t an investment, but that doesn’t mean you should throw money away on it.
  • I don’t need to drive a nicer car than I can afford, and most of my friends don’t care about cars.
  • It’s true that new cars don’t need major maintenance, but maintenance costs over ten years really aren’t that high if you buy a good car.

Arguments for Buying:
There are many arguments for buying a car, but these are three I consider the most important:

  • No more payments after the loan is paid off. You can save or invest the money instead.
  • Maintenance after the warranty expires is much cheaper than a lease.
  • If you ding the car, you don’t have to worry about it.

Lease vs. Buy – Cost Comparison
The most important factor, at least for me, is the total cost over a ten-year period. That’s about how long I keep a car (although I’m currently at 11 years.)

I used a leave vs. buy calculator to compare the costs for a $25,000 car. Even with a lease, you have to pay interest (although not on the total value of the car, only on the amount you’ll use up.)

Leasing:
Down payment: $1,000
Term: 36 months
Interest rate: 8%
Other fees: $100
Residual value at return: 60%
Deposit: $500
Total cost over three years: $14,852.98

Buying:
Down payment: $1,000
Term: 36 months
Interest rate: 8%
Other fees: $100
Total cost over three years: $28,187.43

At first, buying looks way more expensive, except that once those three years are up, you own the car outright. Other than maintenance, there are no more expenses to pay. Let’s say that maintenance averages $1,500 a year. In the early years, you’ll only need oil changes, but after a while you’ll need new brakes, tires, and struts. So, figure about $10,500 in maintenance in the remaining seven years, less if you follow my tips for reducing car expenses. That brings the total cost of owning the car to $38.687.43.

With a lease, you need to get a new lease at the end of those three years. Over the same ten-year period, leasing a car would cost at least $49,509.93. When you factor in the rising cost of cars, you’ll have to pay more each time you get a new lease in order to maintain the same quality car. That will bring the total cost well over $50,000.

In summary, leasing will cost you at least, $11,000 more over a ten year period. If you buy a car that holds its value and doesn’t need to go to the shop a lot, you’ll save more. The residual value of the car can be used towards your next car, or sold for cash, while a lease leaves you with nothing. You have to come up with new cash for your next down payment.

Comments

7 Responses to “Lease vs. Buy a Car – Running the Numbers”

  1. Carnival of Personal Finance # 145: Baby Education Edition | Million Dollar Journey on March 24th, 2008 5:11 am

    [...] from Sound Money Matters analyzes Lease vs. Buy a Car – Running the Numbers, and says, "I compared the cost of buying vs. leasing a car over a ten year period. I'm [...]

  2. nobleea on March 24th, 2008 7:31 am

    This isn’t really a valid comparison, since you’ve gone through 3 (or 4) leased cars, but only one bought car.

    For a fair comparison, you should compare the total costs at the end of 3 years, including selling the bought car (since you have to give back the leased car at the end of the term, for a fair comparison you should give back the bought car).

    Leasing rates are usually 1% higher than loan rates, but 8% is very high. Might be interesting to try with different interest rates (say 2% for lease and 1% for finance).

  3. Aryn on March 24th, 2008 8:24 am

    I ran the numbers out over ten years because that is a reasonable amount of time to own a car. If you bought a new car every three years, it would always be a losing proposition. If you want to be financially prudent, then you should plan to own a car for at least ten years.

    However, I think even at only 3% interest for a lease, the cost would still be higher because the costs of cars rise over time. After 3-6 years, you’d have to pay more for a lease on an equivalent car to the one you just turned in.

  4. Please Let Me Talk You Out Of Buying a New Car | My Super-Charged Life on March 28th, 2008 4:21 am

    [...] will cost you at least, $11,000 more than buying over a ten year [...]

  5. Are We Financially Worse Off Than Our Parents? | Moolanomy on June 30th, 2008 5:02 am

    [...] spending $300-400 a month to lease a car — double that if the family has two. Aryn has a good buy versus lease comparison if you’re [...]

  6. Jordan on June 16th, 2009 1:28 pm

    You simply have to be able say ‘no, thanks at that price’ at least once to the dealer. This gives them a strong message that you are serious about your research.

    You should also bring a piece of paper to the dealership and make sure you do all the math of the finance calculations yourself. The point is not that they will do the math wrong. The point is you will see exactly how the deal is structured. Do not be afraid to take the time to do this or look like a fool for mapping out your car deal in the dealership.

    My dad swears by this process, http://tinyurl.com/nxutm2

  7. Asemgul on December 13th, 2012 12:37 pm

    So you find yourself in a senracio where you have spotted a property that you would really love to purchase, but also know that if you were going to borrow for the property with your present credit report, you’d be in for really high IRs indeed. The concept is generally to get into a lease purchase arrangement ( which implies you get to move into the property straight away, though at first as a renter ) and then use the lease period of the lease purchase agreement which is generally something similar to 3 years to boost your credit report, by measures like taking little loans and paying back them rapidly, maintaining exacting standards of Visa card etiquette, and the like so that when the time for the purchase part of the lease purchase agreement comes, you have improved your credit report enough for you to be accepted for a fair rate.

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