Lease vs. Buy a Car – Running the Numbers

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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 expensesThat 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.

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