The quick answer… it depends on your needs.
While leasing may be a great option for someone who works from home and doesn’t travel much, a real estate agent may be better suited to finance vs lease a vehicle. The reason – the number of kilometers they’ll put on per year.
If you travel 30,000 – 40,000 km/year (around 25,000 miles/year) the extra cost per km will impact the monthly payment and it may make more sense to finance.
Learn The Basics
You’ve found your dream car, a 2010 Mustang GT Convertible and you want to lease. The problem is you can’t lease it. Leases are only available on new vehicles for the majority of vehicle manufacturers. There are some luxury dealers that may offer leases for used inventory but that’s rarely seen on used vehicles.
Financing (Buying)
When you finance a vehicle, you are paying for the entire value of it. It doesn’t matter what condition you keep it in or the number of kilometers or miles you drive. Once you’ve made your last payment, it’s yours to keep. (Assuming you don’t have a lien on it)
Payments for financing a vehicle are normally always higher than the cost to lease. For financing, you’ll typically make a down payment and will pay sales tax on the entire purchase price of the vehicle. The total interest you pay is determined by the financing company, based on your credit score.
One of the benefits of financing is that you’ll have equity in the vehicle after a certain number of payments. That means you can sell or trade it in for its depreciated value. The total equity you have in the vehicle depends on the depreciation of the vehicle along with the outstanding balance you have on the loan.
Financing Example
When you buy a vehicle using a loan, you’ll pay for the entire cost of the vehicle. So if your vehicle is $50,000 (after any applicable fees) it will be hit with depreciation during the term of the loan but you’ll own the vehicle outright and can continue to drive it without having to make any monthly payments.
Assuming you chose to put $0 down and financed for 48 months your monthly payment would be roughly $1,041. If your vehicle depreciates by $30,000 over 48 months, it will still have $20,000 in value if you choose to sell (minus any outstanding loan balance).
Leasing
When you lease a vehicle, you are only paying a portion of the vehicle’s value. It’s the assumed depreciated value of the vehicle after the term of your lease contract that you are financing.
While some dealers may encourage you to make a down payment on a leased vehicle, we don’t recommend you do. Some dealers may require a security deposit and other fees to be paid that you wouldn’t encounter with a financed vehicle.
Leased vehicles are pre-paid. That means you pay for your vehicle a month in advance.
When your lease is up, you can decide to simply return your vehicle or buy it. If you choose to buy, the dealer can arrange financing or you can arrange it yourself through a bank or other 3rd party.
If you decide to return the vehicle you may be charged a lease end fee if there is excessive wear or you’ve gone over your mileage allowance.
Leasing Example
If you were to lease the same $50,000 vehicle from the example above, it may have a resale value of $20,000 after a 48 month term. You’ll only pay the $30,000 difference (the depreciation) plus any applicable fees. In this example, your lease payment would be approximately $625. Nearly half the cost of the finance option above with payments for a shorter term.
But once the payments are done you also will no longer have a vehicle.
Forced Savings?
When you buy a car with a traditional car loan, whether through a dealer or 3rd party, it’s like putting money into a depreciating savings account.
A portion of every payment you make is lost to depreciation so you’ll never get back as much as you put in (unless you have certain luxury cars).
If you plan to drive the vehicle until it dies then equity value at the end of the finance term will mean very little to you.
You can look at leasing as making a payment for what you use, which is the depreciated value of the vehicle. At the end of a lease term, you’ll have nothing left to show for it. No depreciated asset, no leverage for a trade in for another vehicle purchase.
Having said that, if you’re considering leasing you should take a page from the life insurance handbook and “invest the difference” between leasing and buying.
If you’ll save $300 a month on a vehicle by leasing over financing and you tuck that $300/month away in a mutual fund, at the end of a 36 month term you’ll have $10,800. That doesn’t including any compound interest you’ve earned on your investment.
Which Is Better?
It depends on your needs. Let’s look at some short and long term options.
- Short Term – the cost of leasing short term is significantly less than the cost of buying. When you negotiate the final price, the monthly payment on your lease will be less. Even when compared to 0% financing options.
- Medium Term – assuming a buyer sells or trades at the end of the loan term and a lessee returns their vehicle at the end of the lease, the cost of leasing will be about the same as financing. While there are articles that show leasing is only slightly favorable to financing, if you take our advice and invest the difference you’ll come out on top. That’s assuming no excessive wear and tear and no excess mileage.
- Long term – the cost to lease a vehicle is always more over the long term. If you choose to lease and then purchase the vehicle at the end of the lease you WILL pay more for it. If someone who finances a car keeps it after the loan is paid off and drives it for 5 more years, they’ll be further ahead than someone who had to lease a new vehicle after their first lease term is up.
Where Are Your Priorities?
We all have different priorities in life. We have different careers and live in different areas. The decision of leasing vs buying should be made with your needs in mind. Do you have a long commute? Do you work from home?
Buying – If you have a tendency to hang onto vehicles and “drive them into the ground” then buying would make sense for you. If you don’t care about getting the newest features every few years, buying may be for you. If you’ll drive a high number of miles/kilometers or have a job change coming down the road, it’s recommended that you buy.
Leasing – Do you enjoy driving a new car every few years? Do you want lower monthly payments? If you choose to lease, you’ll always have a vehicle that is covered by a manufacturer’s warranty. Leasing may be right for you if you have a predictable lifestyle, don’t drive much every year and don’t care about building equity value in a vehicle.
Considering A Lease?
Another option to traditional leasing is to take over the lease for someone else. It’s less expensive than taking out a new lease and the person you’re taking over the lease from may give you extra incentives for scooping up their ride.
We’ve seen current lease holders give cash incentives or pay for a month or two of the lease so that they can get out of their existing vehicle.
Summary
Leasing a vehicle is right for you if you want to save money on your vehicle and won’t drive excessively. Buying a vehicle is better for you if you tend to drive a lot or if you enjoy paying off the vehicle and not have to worry about a car payment for years to come.
