When to Lease a Car? When to Buy?

A friend of mine recently started having car problems. Her car was old and it is time to get a new(er) one. Being the person who obsesses about finances, she asked me what kind of car she should get. The questions didn’t stop there. Next, she asked me whether she should buy a car or lease one. While I would love to say that I knew the answer for her right away, it just wasn’t the case. To be completely honest, I didn’t even know that much about leasing a car – mainly because my parents never leased a car. They always bought the cars, thereby leaving me with a gap in understanding.

Why do people lease cars when they can buy them? Is it better to lease a car? Is it better to buy one?

As I suspected, there is no easy answer, but I do hope to shed some light on the basics of leasing a car and when it is better than buying your own car. While I am still against financing cars, I know that not everyone has this luxury and leasing or buying a car with financing might be someone’s only option.

How to Lease a Car – Basics of Car Leasing

After doing some basic research with my friend Google, I found a great article aboutĀ leasing a car. This form of getting a carĀ is actually quite a simple concept. The idea is that instead of buying a car (either with financing or cash), you are renting a car. In other words, a third party buys the car (usually a bank) and allows you to use the car for a monthly payment (and down payment). You general lease a car for a set number of months, ranging from 2-5 years. You agree to take care of the car, performing and paying for regular maintenance and return the car at the end of the lease. As I have been told, some (if not all) leases have the option of buying the car at the end of the contract.

Benefits of Leasing a Car

While leasing a car may not be for everyone, it does have its benefits. As I can tell, leasing a car gives you the advantage of not having to worry about selling the car after a few years. This may not sound like a lot, but for those who are strapped for cash, this may be an answer to prayer. Otherwise, imagine this. You want to upgrade your car and you have some cash to buy the next car. In order to keep your cash reserves in place, it means selling your current car. But, you can’t just sell your car without a new one. Often, it means that you buy a car, scrape buy for a few months while hoping and praying that you sell the car. This can be stressful as any other financial challenge.

Another benefit of leasing a car is that you can drive a new car for less than it would cost to buy it. Leasing a car is generally lower than the monthly payment to purchase (even though it means you will always have a car payment – if you keep leasing). Not only is it generally lower, but it also means that you don’t have to worry about whether you will owe more than the car is worth.

Last, but certainly not least, leasing a car means that you are driving a new car. With that, the odds of having to deal with car repairs is significantly lower. As a general rule, you don’t have to worry about major repairs. As we all know, dealing with major repairs can be expensive and time-consuming.

Why Leasing a Car Could Cost More

While leasing has its advantages, it isn’t without it’s downsides. While my friend is convinced that leasing is the best option for her at this point in her life (and apparently 20% of Americans as 1 out of 5 cars is leased), I am not entirely convinced. The best way that I have found to determine whether it is the best financial option is to estimate the total costs per year. Let me give you an example.

If I can buy a new car for $20,000, in two years, it will be worth approximately 14,500 (assuming 15% deflation rate each year). Assuming I can either find 0% financing or pay cash, that means I am spending $2750 each year plus gas and maintenance. Let’s imagine that I can lease the same car for 2500 down at signing and $200 per month. A 24 month lease would mean that I am paying $4,800 in monthly payments in addition to the $2500 down. $200 per month for a new car may sound like a great deal, but it really means I would be paying $7,300 for the two years or $3650 each year plus gas and maintenance.

This was only an example used to illustrate the calculation, but the key is that deflation or the value of the car at the time of selling the car is often over-looked. Instead, people often place emphasis on the short-term costs (monthly payments) instead of the long-term costs. Since you are still responsible for maintenance, I would guess that leasing a car is often more expensive than buying (but I would have to do more research).

Buying or leasing a new car may not be the best options to choose from (I prefer to buy a used car because it’s value depreciates slower). Yet, when forced to choose between the two, I will side with buying a car over leasing because I have the cash reserves to not stress about selling the car in a short period of time. Everyone else may not have the time or money to save by buying a car, and therefore leasing may be the better option.

Have you leased a car before? What was the deciding factor?

 

18 Responses to When to Lease a Car? When to Buy?

  1. Sid says:

    I have thought about leasing a car before. Besides the payment calculation, you have to also consider that most leased cars have a limit on the number of miles you can drive in a year. My job used to be over 30 miles one way from my house, so I had to drop the idea of leasing a vehicle.

  2. I think this one is tricky — if you know that you only want to drive a car for three years, then fine, you’ll get used to the car payment, you’ll always have one, and it’s no big deal. For me, it’s not worth it because I don’t want to buy a new car until my current car sputters its last breath, which will likely be five to ten years from now.

  3. I don’t mean to sound like a grumpy old blogger, but after the first two sentences I knew that your friend was going to waste money. “A friend of mine recently started having car problems. Her car was old and it is time to get a new(er) one.” If you just recently started having car problems, that is no reason to get a new car. And what qualifies as “older”? I think it might be better to help her find a good mechanic that won’t rip her off, or maybe she knows someone with a little car maintenance experience who can keep her car running?

    I would just qualify her situation a little more rather than just agreeing she needs a new car. It’s weird, we don’t do this with other things that need maintenance, example “My plant keeps needing water, I need a new one” or “My bike has a flat tire, I need a new bike’ or “My house is dirty, I think I need a new one”. I believe that people are scared of cars because they don’t understand them at all, so when there is a perceived issue they deem it “unreliable” and look for a new one. This works with clothes or tools but should not be this way with something that costs tens of thousands of dollars everytime it’s replaced.

    tl;dr Cars should be maintained, not replaced. New does not always mean reliable. People should not buy something they don’t understand. I’m not saying you need to know how to replace the tranmission, but at least know what maintenance is needed to kep the car going besides your oil changes. 20 seconds on the internet could save tens of thousands of dollar, heck maybe even hundreds of thousands over her lifetime.

    /rant

    Sorry about that, but I have a certain passion for this topic. I’m not saying you did anything wrong, and she may well need a new car, but I would venture to guess that most people that buy new(er) cars don’t. My $0.02. :)

    • Corey says:

      haha – great comment. It’s moments like these that I wonder how much you and I are alike. About two weeks after I wrote this (about a week ago), I talked to her and told her that I think she should just get her car fixed. :) I told her that even if she had to pay $2k to fix it, it would be much cheaper to do that and have it last another 2-3 years than lease a car. Short answer, I couldn’t agree more with you. I think that’s a great analogy about having to buy new cars, but not anything else, btw.

      • Haha, that’s perfect! I just get fired up about the “buying a new car” topics. It’s the one place I feel like people can save tons of coin, but elect to waste it because they haven’t done any research! Nice work on suggesting to fix instead of replace. We must be brothers from another mother, LoL! When I first started reading PF blogs, I saw your and was like “that’s totally me.” No joke. Maybe because I’m in my “20′s” and love personal “finance” ;)

  4. I’ve never leased a car or even known somebody that did. Aside from the fact that I’ve only ever bought used (very used), I like to keep my cars around for a while. I had my old Camry for almost 8 years before I crashed it and had to get rid of it.

  5. Hey Corey! We’re on team 6 together with the Yakezie teams.

    Anyway. My mom used to lease cars and I always wondered why. At the end of the term, she’d have spent a lot of money on the car but didn’t have anything to show for it. I think she financed her current car, and I did the same with mine – at least I own it at the end of the term!

  6. My preferred method is to pay cash for a nice used car. My wife and I made a commitment to drive our cars to at least 250,000 miles while saving what we used to spend in car payments every month. When her previous car hit 250k it still ran very well, but we had $20,000 to spend on a killer used Infiniti that someone else had leased and had nothing to show for all that money they had spent.

    Financing a car with a loan or lease ALWAYS means that you pay much more than if you had paid cash, and that extra you’re paying is for a depreciating item to boot.

    We will never go back to having a car payment again. I wrote a post detailing how we did it a few months ago that you may be interested in.

    4 Steps to Getting Rid of Car Payments Forever http://wp.me/p1yqwF-8Y

  7. jefferson says:

    leasing is icky.. the upfront costs are just absurd, considering that you really don’t get any return on your value.

    i have always bought and presumably always will. it sure would be nice to pay with cash tho!

  8. I think if you want to drive a new car all the time, then leasing might be a good option. We drive our cars into the ground though so I don’t think the number works out for u.

  9. Thank you for this! I’m the market for a new car (my car is 17 years old and not quite chuggging along like she used to). I was weighing the pros and cons of leasing, and this was a great article.

    I think its also important to point out that some dealers offer incredible incentives to purchase a vehicle. There are military and college rebates (anywhere from $400-$1000 off the price in addition to other current rebates) that are only applicable to purchased cars, not leased. Some manufacturers offer enticing warranties that make those looming future auto repairs not so scary. Hyundai has the 10-year/100,000 mile warranty. Unless you travel cross-country via car on a regular basis, you’re nearly guaranteed a solid three years of cost-free maintenance (hopefully, its more like 10 years though).

  10. If you can afford to pay for a car in full, surely it is ALWAYS better to pay for a car than lease it? I just can’t see how the maths works out.

    • Evan says:

      What does better mean? It is like you didn’t read the middle part of the post where it says that getting a new car is of value to some people.

  11. [...] you want to go this route, then you know the right way on how to lease a car. Here are 6 advantages of leasing a [...]

  12. [...] was, only to be convinced the other way? Recently, a friend of mine told me of her desire to lease a car and she wanted my help. Originally, I was a skeptical, telling her that the best financial decision she could make would [...]

  13. Mike says:

    I’ve never financed or leased a car, but my accountant is advising me to lease as car for my business. Does it make any sense to pay the entire lease off when I pick up the car?

  14. [...] decent salary is to buy a new car. While it may be beneficial to learn how to buy a new car or even how to lease a car, it will put a strain on your finances for years to come. Jumping into a monthly payment can [...]

  15. Christina says:

    Sure it looks like the dealer paid it, but every deler gets in back in
    their monthly advertising allowance on each new vehicle
    they have in stock. Not to forget the ease with which you travel; you are completely free too strop wherever and whenever you want.
    A smaller car, it is still expected to pick up some buyers who would have gone with Toyota or Mazda.

Leave a Reply