On my first day in accounting class, we were given a problem to solve: should you rent or buy a car? Once we were done solving it, the professor emphasized the answer: you should never, ever lease a car. Looking at the math, I completely believed him.
However, when I got out into the real world and started learning more about personal finance, I came across a conflicting adage. It says you should buy appreciating assets (those that increase in value, such as a house), and you should lease depreciating assets (those that decrease in value, like a car).
So what’s right, my accounting professor or the personal finance adage?
Turns out, it depends.
A sample scenario:
Let’s say you’re in the market for a 2017 Toyota Camry. The cost to buy it is $21,000. Your options are to buy it with $2,500 down and a 36-month financing plan (at 4%) or lease it.
Using this calculator at Edmunds, you can work out that if you buy it, you’ll have monthly payments of $550. At the end of those three years, you’ve paid $22,300 for your car and you own it outright. The car is now worth $13,000, according to Kelley Blue Book estimates.
Had you leased the car, rather than buying it, you would have paid $9,360 over three years ($260/month). But you won’t own anything at the end of those three years.
These two scenarios end up roughly the same. If you were to sell the car after three years, you would get $13,000 back, which means your total out of pocket costs are $9,300. Compared with $9,360 that you spend on leasing, and the difference is negligible.
Where You’ll See a Difference
Where you’ll see major differences, however, is after those three years. In the same scenario, let’s say you decide not to sell the Camry and you drive it for an additional three years. After those three years, you haven’t made additional monthly car payments. And now you still have a car that is worth $9,250.
If you were leasing the car, you sign up for another three-year lease, which costs you $9,430 again. The total cost for leasing the car for six years is $18,864, and you don’t own a car at the end.
In this scenario, buying is better financially. You’ve spent $22,300 on payments, but you have a car that you can sell for $9,250. If you’ve leased for six years, you’ve spent $18,864 but don’t own a car.
Here’s what you should consider before deciding what’s right for you…
Why you should buy a car…
You don’t want to be bound by the mileage or wear and tear fees.
Aside from monthly lease payments, at the end of the lease period if you’ve gone over the included mileage (usually 12,000 miles per year) or you’ve incurred excessive wear and tear, you’ll be liable to pay a fee. These fees can be quite substantial.
You want to own your car once you’re done making payments.
A common criticism of leasing a car is that you don’t actually own anything once you’ve made three years of payments. If making payments and ending up with nothing at the end bothers you, buying is the best option for you.
You plan to own your car for longer.
As you can see from the example above, the longer you plan to own your car, the more it makes financial sense to purchase it. If you are happy to drive the same car for many years, buying will be a better option.
You can handle the down payment and higher monthly payments.
To pay the least amount of interest and to avoid being upside down on the car (where you owe more than the car is worth), you’ll want the shortest loan term possible. As shown in the example above, this meant putting $2,500 down and having a monthly payment of $550.
Why you should lease a car…
You’re concerned about cash flow.
When you lease a car, the monthly payment is usually significantly less than what you’d pay when buying a car. In our example, a monthly payment to purchase the car is $550. A monthly payment to lease the same car is $260 each month. If your monthly cash flow is tight, leasing a car might be the better option.
You drive a car where maintenance is expensive.
The factory warranty that comes with most cars is 36 months. If you plan to lease a new car every few years, you’ll always be covered by warranty for costly repairs. This can be especially helpful when you own a foreign car that has high maintenance costs. If you were to buy a car, after three years the warranty would expire. You’ll be on the hook for any expensive maintenance that is needed.
You’re worried about qualifying for financing.
If you have less than good credit or you don’t have a decent down payment, qualifying for financing to purchase a car can be difficult. Luckily, when you plan to lease a car, the requirements are less stringent. Qualifying for a lease should be much easier.
You want the opportunity, but not the obligation to buy.
At the end of a lease, you’ll have the opportunity to purchase your car, should you not want to give it up. You could treat your three years as an extended test drive and choose to purchase if the car, and price, are right.
There are so many different decisions and scenarios that come up when you need a new car. Hopefully using the example above, you’ll be able to come up with the answer that works best for your situation.