Lease VS Buy

This used to be my most common question asked by my clients.  Even though I do not get this question as much because leasing is so prevalent now, for those new to leasing, it’s still a valid dilemma.

The first thing that you need to decide is if you are willing to keep the car at a minimum of four years.  Five to six years is better, but if you don’t think you want to keep it that long, than buying is definitely not for you.  The reason is; when you first take that new car off the lot, there is a massive hit to its value, known as depreciation.  It goes from being brand new to used, which automatically takes 10-25% off the value of the car.  You need to spread that loss, plus a continued value loss, over these 4-6 years in order to get a good monthly value on your purchase.  For example:  Purchase a 20,000 car.  It’s worth $16000 the day after you bought it.  If you sell this car after 6 months, it costed you $666 per month to drive it, if the value after four years is 10,000, your monthly cost of ownership is only $208. That’s the basic idea.  There are a ton of variables that can change this calculation, but I want to just address the concept.

OK, I like keeping my car for 4 years or more, should I definitely buy my next car?

Well, that also depends on a few more things; Budget, Mileage, Condition, Lease Deal and Maintenance.

Budget:  A purchase (finance) without a lot of money down will have a higher monthly payment, Usually much higher than comparable lease, usually double or more.

Mileage:  How many miles per year do you drive?  IF you drive very little (<5000) miles per year, that’s a few points in the “buy it” corner.  If you drive a ton of mileage (>25,000) miles per year, then you are going to de-value your purchase very fast, plus have a nice amount of maintenance costs.  A lease will have the same maintenance costs, but sometimes you can lease a car for as much mileage as you need, and its better to have it for 3 years and return it than own the car with 100k miles on it.  This is a grey area of the debate.

Condition:  In today’s world everything is recorded.  That includes and insurance claims or car accidents. These reports (i.e. Carfax) are made available to the used car market.  So, if your car has any one of these records on it, it automatically hurts the value by a chunk.  It doesn’t matter if the car was in a major accident or a scratched bumper, a mark on the report makes you guilty.  (Note: a major accident that causes the “frame” of the car to be damaged will further eat away at the value).  Bottom line, sometimes these incidents are beyond your control, but it will hurt your pocket when you look to trade in that car.

Lease deal:  Even if you are the perfect candidate for a purchase, sometimes the lease is just too cheap. The manufacturer or bank is giving such a large incentive that makes the lease irresistible.  This happens a lot, so always check a lease price even if buying is your comfort zone.

Maintenance:  All new cars come with at least a 36 month or 36,000 mile bumper to bumper warranty (whichever comes first).  Most leases conform to this term, or only a few months later.  This means that you will have almost no maintenance costs outside oil changes, filters, tires and brakes.  When you buy a car, unless you purchase an expensive extended warranty, you run the risk of major repair bills.

One more thing; it’s a popular line for people to tell me that they rather purchase/finance because they are paying off equity and “they own it.”  Well that is true, but it’s not the whole truth.  Remember your car is depreciating in value daily, so you are essentially mostly paying for deprecation, not equity.  A lease payment is basically the expected vehicles’ depreciation over the lease term plus interest.

After all these considerations, sometimes it’s just simple numbers.  If the vehicle you want has a bad lease deal, then the purchase becomes more attractive.  IF you want more flexibility to switch cars when you want, then leasing is also not for you.

For everyone else, leasing allows you to get a new car every 2-3 years, without the concern for un-expected costs or the disappointment of bad trade in value.  It makes budgeting much easier.

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