- Smart Investing
Buy or Lease a Car – Which is a Better Deal?
We’ve all heard from our friends who say that leasing these days is the way to go when getting a new (or used) car. Others will tell you that leasing is a waste of money and the right financial decision is to buy outright. So, which way to go? As with any financial decision, the answer is that it depends but luckily in this case there are not that many factors influencing the decision.
First, let’s talk about leasing. Leasing is like renting in that you never really own the car. Instead you are making payments to the owner (often the finance company associated with the car company) for the right to drive the car a certain number of kilometers per year. They calculate the lease payment by taking the purchase price, determining the likely value of the car after the lease is over (based on the number of kilometers to be driven) and then spreading that cost over the period of the lease, often 3 years. Then, of course they charge interest to cover the cost of the car over the period (because, essentially SOMEONE is buying the car and financing it and giving the car to you to use).
Now, when you buy the car outright you actually own the car and instead of paying someone for the right to drive the car, you (usually) take a loan from a financial institution to spread the cost of the car over time. Of course, if you have the money, you can pay everything up front and avoid the interest payments.
Which is Better Financially?
From a purely financial perspective there is not much difference between owning and leasing. Unless you buy the car outright and avoid a loan, you are going to be paying interest on the amount you don’t pay upfront either in the form of a loan or as the interest imputed into the lease payment. Rates are typically higher for a lease so typically you will end up paying more for a lease. Plus, insurance is often higher. So, from a strictly financial perspective, owning tops leasing although the difference is usually not so high that people make the decision on owning versus leasing strictly on financial terms. People usually make the decision on owning versus leasing based on other factors.
The Other Factors
The other factors actually are the ones that determine if it is better to own or lease.
Do you own your own business? If so, it is easier to deduct the cost of a lease as a business expense (for expensive cars). Leasing might be right for you in this case.
Do you have little downpayment? If so, it might be easier to get a lease versus an outright purchase although some purchase agreements can require little down as well.
Can you only afford a small monthly payment? Similar to the downpayment, lease monthly payments are lower since you are only paying for the car during the period of the lease. In a three year lease, for example, you might have a $30,000 car depreciate to $20,000 over the 3 years. You are paying on the $10,000 difference because you don’t own the car after the 3 years. In the case of ownership, your monthly payment is calculated on the entire $30,000 value of the car, so the payment is usually higher.
Do you typically keep your cars for 5+ years? If so, you should consider a purchase. When you lease you are only paying for the time you own the car. But the first 3 years are also the time when the car depreciates the most too. You can get longer leases of 4 or 5 years but if you plan on keeping your car for a long time, look toward ownership. Since you own the car, once you’ve paid off your loan you get the advantage of owning the car without monthly payments. After 4-5 years, it makes more sense to buy if you can.
Do you typically get a new car every 2-3 years? The opposite is also true. If you like to have a new car every 2-3 years then leasing probably makes sense for you as leasing was really designed for people who like to own new every couple of years. Note that you will pay a lot more for that luxury.
So, as with most financial decisions, the decision on owning versus leasing depends on your situation. Happy Motoring!