Buy a car or lease a car: Which is better?

Should you buy a car or lease a car? Which is better?

When it comes to the full cost of driving, leasing is never cheaper than buying. Ever. 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 on the entire loan value during the lease period, the leasing company’s profit (called money factor), dealer preparation and a disposal fee. You don’t ever get those fees back. It’s money out the window. So, if you’re asking whether to buy a car or lease a car and your main concern is cost over time, the answer is always, buy it.

Leasing is just a fancy word for renting

Let’s call leasing what it really is; you’re renting it. You pay the down payment, all the monthly payments and the disposal fee at the end. You accumulate no equity and you own nothing. However, when you purchase a car, you accumulate equity. Once you pay it off, you own it and it still has value. Even when you factor in the higher costs of maintenance like tires, brakes and fluid changes, you still come out ahead (assuming that you bought a reliable vehicle in the first place).

But there are some good reasons to lease

• Leasing is good if you don’t have enough cash to make a large enough down payment to get your loan payments down to an affordable amount.
• You get to drive a new car with an affordable monthly payment.
• Leasing preserves your cash so it’s available for emergencies or other purchases.
• Leasing allows you to get a new, vehicle every 3 or 4 years.
• Leasing allows you to get the latest safety features.

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