Is leasing a new car cheaper than buying?
Leasing a new car is never cheaper than buying when you look at the costs over a longer term than just a single 3-yr. lease. Here’s why. New cars depreciate the most in value during the first three years. When you lease a new car, you’re paying for all of that depreciation, plus the acquisition fee, interest and the leasing company’s profit (called money factor), dealer preparation and a disposal fee. You don’t ever get those fees back. So let’s call leasing what it really is; leasing is just a fancy word for renting. When you lease a car, you’re really just renting it. You accumulate no equity. However, when you purchase a car, you accumulate equity. Once you’re past the high initial depreciation years, ownership costs fall dramatically, even when you factor in the higher costs of maintenance like tires, brakes and fluid changes.
But there are good reasons for leasing versus buying. If you don’t have enough cash to make a large down payment, then leasing may allow you to get a new car with an affordable monthly payment. Or, if you have the cash for a down payment but need it for emergencies, leasing may be the right way to go. But don’t kid yourself into thinking it costs less than owning—it doesn’t
Should I lease a car or truck?
No. Leasing a new car is never cheaper than buying when you look at the costs over a longer term than just a single 3-yr. lease. Here’s why. New cars depreciate the most in value during the first three years. When you lease a car or truck, you’re paying for all of that depreciation, plus the acquisition fee, interest (called money factor) and a disposal fee. When you lease a new car, you’re paying for all of that depreciation, plus the acquisition fee, interest (called money factor) and a disposal fee. You don’t every get those fees back. So let’s call leasing what it really is; leasing is just a fancy word for renting. When you lease a car, you’re really just renting it. You accumulate no equity. However, when you purchase a car, you accumulate equity. Once you’re past the high initial depreciation years, ownership costs fall dramatically, even when you factor in the higher costs of maintenance like tires, brakes and fluid changes. More on that below.
This is a series on car and truck leasing. I’ll answer the most basic questions like, “Should I lease a car or truck” along with more involved questions like:
• the best way to shop for a car or truck lease
• what’s negotiable and how far you can push for a better dea?
• how long should the lease period be?
• should you get an open-end lease or a closed-end lease?
• who pays for maintenance during the lease?
Why lease a car or truck?
If leasing a car isn’t cheaper, why do it? The most compelling reason is that leasing reduces your down payment and is lowers your monthly payment. That’s a great option for people who don’t have enough cash on to make a large enough down payment to get an affordable monthly loan payment. Leasing can also be a reasonable option even if you have the cash for downpayment, but want to keep it in the bank for emergencies but still want a lower monthly payment.As long as you understand that you’ll pay more to lease a car or truck over the long term, leasing may be the way to go.
Here’s a buy-versus-lease example
Assumptions: We’ll base this lease versus buy example on a 2016 Honda Civic Sedan LX and compare costs over a six-year period. During the first three years, both the leased and the purchased vehicle require the same amount of maintenance (oil changes, air filters, tire rotation). Whether you lease or own, you have to pay the maintenance costs. However, since both vehicles will be covered by the manufacturer’s warranty during the first 3-yr. period, you won’t have any out-of-pocket repairs.
During the second three year period, the purchased vehicle will require some additional investment in maintenance beyond just oil changes and filters. But the 2nd 3-yr lease will only incur normal maintenance costs. For ease of comparison, I’ll assume that the 2nd 3-yr lease vehicle is the same as the first and the acquisition costs are the same (not likely in the real world, but it makes the comparison a bit easier to understand).
Costs of car ownership over six years
The 2016 Honda Civic Sedan LX has a sticker price of $20,275. With an end-of-model-year-incentive, Edmunds.com shows that most people in the Midwest can negotiate the purchase price down to $18,045. Add in sales tax and the license fee and your total comes to about $19,218. If you pay $5,000 down on a 60-month loan at 3% APR, your monthly payment will be $255. License and other fees in later years will be the same whether you own or lease, so I won’t add those into the price.
In the first three years of ownership, you’ll have paid 14,180 or 0.39/mile (based on driving 36,000 miles). That’s considerably higher than the per mile cost of leasing, but it doesn’t tell the whole story, because you’ll pay off the loan during the next three year period. Those final loan payments total $6120. Since the vehicle is starting accumulate more miles, you’ll have to buy new tires ($550), a new battery ($125), brakes $250 and perform routine inspections and fluid changes ($600).
The total you pay in 2nd 3-yr period is $7395, for total of 21,575 over the six year period. However, keep in mind that you’ve had a full year of ownership with no loan payments and you now fully own a car that has a trade in value of approximately $6,000. Deduct the trade in value from what you’ve paid so far and you drop the cost of ownership down to 0.219 per mile.
If you keep driving the car, your cost per mile drops even more until you reach a break-point where you may be paying more in major repair costs than the vehicle is worth. Depending on the reliability rating of the vehicle, it may make sense to buy a new vehicle at the six year/72,000 mile mark.
Costs to lease a car or truck over three years
If you lease the same car, you’ll need a $2,000 down payment to get your monthly payments down to $191 (3-yr lease with a mileage cap of 36,000 miles). During the 3-yr. lease period, you’ll have paid $8,876 or 0.246/mile. That may lead you to believe that leasing is cheaper because the first 3-yr cost of owning is 0.39/mile. If you plan to lease for 3-yrs and never lease or own again, leasing is your best option. However, if you lease another new car for three years, you would have been better off buying. Two 3-yr. leases will cost you $1,944 more than buying the car and keeping it for three years.
Final thoughts on car leasing
I obtained the leasing figures for this example from a Honda end of year leasing promotion. The monthly payment is based on the acquisition cost shown in the example and includes a $595 acquisition fee. However, since it’s an end of year lease, it includes an extra end of year incentive (rebate) and the lease waives the other customary leasing fees like dealer preparation fee and a disposal fee. If you don’t buy an end of model year vehicle, those extra leasing fees will raise your total cost.
Finally, Honda has a very high resale value, so its higher residual value results in a lower lease payment. If you make the mistake of leasing a vehicle with a lower reliability rating with a corresponding lower residual value, your lease payment will be higher. In an apples to apples cost comparison of leasing versus buying, the lower residual value will affect the trade in value of the purchased vehicle as well, making it somewhat cost effective to keep the vehicle longer than six years.
©, 2016 Rick Muscoplat
Posted on by Rick Muscoplat