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 about leasing a car. This form of getting a car 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?