For some people, the decision whether to buy or lease a car is simply a matter of preference. But which is the better financial decision? To answer this, you must evaluate long-term cash flows and winnow out the (often hidden) costs. This can be difficult to do, especially when the salesman is tapping his finger on the contract in front of you!
First, you need to know what each option will cost you.
Up Front Costs
Leasing a car will often require a down payment, security deposit, and sometimes other fees. Buying a car will have similar costs (down payment, taxes, title, registration, etc.).
A car lease often includes interest, even if they don’t call it that. There may also be monthly fees. Auto loan payments are typically going to be higher than lease payments for a similar term, mainly because you’re also paying down principal. On the other hand, you may have higher insurance premiums for a leased car because of requirements in the lease terms.
Turning in the car early might be almost as expensive as keeping it for the entire lease term. On the other hand, if you’ve bought the car, you can sell it whenever you want and get some of your equity (those principal payments) back.
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An auto lease typically has a limited mileage allowance, above which you may owe per-mile charges that can really add up. If you’ve purchased the car, you can drive it as much as you like. But keep in mind that high-mileage cars often have lower trade-in value than a similar car with lower miles.
Wear and tear
Excessive damage to the car over the lease term will cost you, since the dealers typically require the car to be returned in salable condition. Make sure you understand clearly what the dealer’s expectations are (and what’s written in the contract). While some lease agreements may include periodic maintenance, others may not. Read the fine print carefully.
At the end of the lease, you’ll have the option to buy the car or hand over the keys and walk away. This is a mixed blessing; there are no further responsibilities, but you also have little to show for the payments you’ve been making. If you bought the car and made loan payments over the same period, you’ll have an asset with some residual value.
So how does leasing compare to buying the car? The short answer is “it depends”. On a straight-up comparison (leasing for several years versus buying and then selling the car), the lease typically ends up costing more in the long run, even if it offers lower payments along the way. This is because you have no residual value at the end of the lease, compared to buying a car at the start. Also, the lease period covers the most expensive period of car ownership – the first couple of years when the car loses the most value.
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That said, if you find you really like driving a newer car, a lease probably also makes financial sense because of the built-in costs of buying and trading in a car frequently. If you drive a LOT (more than 15,000 miles in a year), then buying probably makes more sense because the mileage charges for a typical lease will add up quickly. Similarly, someone who tends to keep cars for a very long time will clearly benefit from buying instead of leasing.
For young shoppers, it’s a very tough decision. They may not be able to afford the higher monthly car payments or will have to pay higher financing costs due to their lack of credit history. Here, especially if the low payment is the driving concern, the lease may be the more attractive option, especially if you can save the difference (rather than spending it on other things).
At Blankinship & Foster, we do far more than investment management. We help clarify and organize your finances, maintain a sound financial plan, and navigate life’s transitions with confidence. Contact us to learn more about how our proven process brings clarity, confidence and direction to your finances.