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Should you buy or lease your next car?

In the never-ending debate over buying vs. leasing cars, leasing still loses. Here's why buying is usually better, some exceptions, and my ideal solution.

By Stacy Johnson Feb 7, 2011 5:41PM

Car leasing remains a popular option for Americans, but for most people, it doesn't make much financial sense.

 

Consider a hypothetical car with a sticker price of $27,000. If you buy with $1,000 down, and finance it over three years at today's average rate (per Bankrate.com) of 5.7%, your payments will be about $780 per month. After three years, you'll have paid a total of about $29,350 and own a car that should be -- if it's depreciated by 50% -- still worth about $14,000. Net cost if you choose to sell: $15,350.

Compare that to the cost of a typical lease: Let's say you put the same $1,000 down, then lease it for the same three years. According to this calculator at Edmunds.com, if your car has the same $14,000 residual value and the same interest rate (known as the "money factor" in lease lingo) you'll pay $567 per month. Three years later, your final cost will be $20,412 -- about $5,000 more -- and you'll be car shopping again.

 

Check out the following news story that addresses the lease vs. own question, then meet me on the other side for more.

But what about the "advantages" of leasing?

"OK," someone might say, "but what about the perks of leasing?" Answer: What perks? Let's look at what buyers get.

  • The privilege of being sleek or being a slob. If the car is yours, you can do what you want with it. That means you can customize it to your heart's (and wallet's) content -- custom paint, rims, tinting, a trendy spoiler, an amped-up sound system, whatever. It also means it's OK to eat fast food inside and it won't matter if you spill a little ketchup or soda. You can smoke inside if you want. You can leave it messy and not wash it for months. Of course, all this might affect resale value, so I'm not saying you should -- just that you can. Remember, a leased car is essentially a rental car.
  • You can go anywhere. According to Edmunds.com, leasers usually face annual limits of between 12,000 and 15,000 miles per year, with expensive per-mile penalties for going over. Owners can go on long, impromptu road trips without worry. They can also drive to Mexico or Canada without having to get anyone else's permission, something you often can't do with a leased car.
  • You own something of value. The biggest and most obvious benefit of ownership is: It's yours. Once you pay it off, your only costs are fuel and maintenance. You can drive it until it has to be towed to the junkyard, or you can sell it to somebody else while it still has a high resale value. 
  • You can get out if you have to. You're suddenly offered a great job in Tokyo. What will you do with your car? If you own it, you can sell it. Granted, you may take a bath, especially if you just bought it. But at least there's an exit. With a lease, your only out -- other than simply making all of your payments in full -- is finding someone to take it over. (See "How to get out of a car lease.")

In short, when you lease, you're swapping lower monthly payments for restrictions and additional potential problems.

Why lease?

So, why does anyone lease a car? You probably figured that one out when you read the example above: It's not easy to cough up $800 every month for car payments.

To put it bluntly, most people who lease are paying lower monthly payments so they can drive a car they otherwise could not afford. And if they aren't setting money aside, and also insist on a new car every three years, they're going to get stuck in a leasing cycle because their budget and lifestyle won't allow them to afford to buy one.

Is there anyone for whom leasing really makes sense? Sure. There are situations where it might:

  • You can't afford a newer car, but need one because your job entails driving clients around. Think real estate agent. (Although they may run into mileage-limit issues.)
  • You really don't feel safe in anything less than a late-model car, you don't have the cash, and you can't afford the payments to buy one.
  • The lease is subsidized by the manufacturer or dealer to the extent that it's actually cheaper than buying with borrowed money. You can use a lease vs. purchase calculator to find out, or better yet, do the math I did above. Simply add the total lease vs. loan payments and see what you come up with. If you need a calculator to see what the payments are to buy, here's one from MSN.
  • You take over a discounted lease from someone who can no longer afford it on a site like LeaseTrader.com.

The best solution

I'm 55 years old and I've never bought, or leased, a new car in my life.  The car I drive today is a 2000 Mercedes S430. It costs about $80,000 new. I bought it several years ago with 75,000 miles on it for about $20,000 cash. I've put about 50,000 miles on it since then, and somebody recently offered me $12,000 for it.

I take care of my car and, thus far, it's taken care of me. It's a much nicer, safer and more luxurious car than those of most of my friends, which is odd because nearly all of them paid more for their cars -- a lot more -- than I did. That's because they bought or leased them new.

 

The person who bought my car new essentially paid $60,000 to drive 75,000 miles -- a lot more if they leased or financed it. I've paid about $8,000 to drive 50,000 miles.

 

What more do I need to say?

 

More from Money Talks News and MSN Money:

8Comments
Feb 8, 2011 8:29AM
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One factor that needs to be figured in is maintenance.  For a new or leased car, that's one trip to the shop every six months for oil and lube.  For a used car you can expect to pay a lot more as parts start needing to be replaced and shop costs go up.  Reliability also goes down since a battery, fuel pump or plumbing leak usually gives you no or little warning of failure.  I would expect to pay an additional $20,000 to keep it running in a reliable fashion.  Still cheaper than a new car but also to the point where body damage (leaks and rust) becomes a major concern.  And there is always the question of the first owner doing all the proper maintenance because if he didn't, you are paying for it.  I have several friends who do save a lot of money driving used cars.  For the most part they have a lot of knowledge of automobile repair and maintenance.  And a few friends who always end up replacing major components like engines and transmissions.
Feb 8, 2011 10:39AM
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A little knowledge is a dangerous thing...and Mr. Johnson has limited knowledge regarding leasing!  Several years ago the Minneapolis Star Tribune printed in great detail how leasing was $3,000 more favorable than buying.  The Tribune writer may have attended car financing school with Mr. Johnson.

Bottom line....run the REAL numbers, not the stock numbers in your computer.

Feb 8, 2011 2:56PM
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Finally! The best solution is my solution too. Pay cash. Buy used.

 

I bought a 1993 Toyoya Camry for $5200. Drove it for 3 years. The main computer went out. I junked it in exchange for the "repair" bill. Oh well. It could have lasted much longer, but it didn't. Cost to drive for 3 years - 144/mth, but think about it. That's not a payment really.

 

I bought a 2000 Volvo S80 for $10,800.  (new sticker $42,000) Drove that for two years. I didn't like the expensive maintenance. Too many bells and whistles to go wrong. You live and learn. Sold it fast for $6300. Cost $4500 - $187/mth.

 

I bought a 2005 Toyota Matrix RX for $12,500. It's been at least 18 months now. Nice, reliable car. I hope to drive it for several years. I put a lot of miles on the Camry & Volvo, but not this one.

 

I still build up saving in case I need to buy another car.  Each time I'm able to buy something nicer if I choose. Some day when I'm ultra rich, I'll buy a new car. But paying for depreciation is like throwing money into the fire.

Feb 8, 2011 4:56PM
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The math is correct.  The dealer gets the residual value not the lessee.
Feb 8, 2011 12:13PM
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Yeah, a s****ing car dealer posing as an objective contributor is a dangerous thing too.
Feb 8, 2011 6:14PM
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Leasing allowed me to have a brand new/ $35,000 car for a monthly payment of $250.   $1435 was due at signing.  After the lease period, I purchased the vehicle (residual minus $3800 as an incentive) on a 5 year loan at 6.99%.  Made big payments for 2 years, then paid it off.  I believe I came out way better than buying new.  I have a late model vehicle, low mileage and I know the history of the vehicle.   I think I did well on this one.  I'd have to go back to the paperwork to get the actual numbers, but I know I did better than buying a new vehicle out right. 
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I lease for the convenience and the security of knowing that my car is always under warranty.  I've bought and kept other cars for far too long, and paid huge repair bills on a 7 or more year old car.  With the car I currently have, I know that as long as I meet the basic maintenance requirements, I won't be stuck with a nasty surprise again.  Leasing may not be the most financially sound decision, but it's a rational one in the larger context, at least for me.

Feb 8, 2011 3:17PM
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Go back to the first paragraph and redo the math. 
I'm not saying leasing is a good solution, but at least argue the correct facts including the math.

780x12x3=28080, 28080+1000down = 29080 total outlay, 29080-14000 value =15080 cost

567x12x3=20412, 20412+1000down = 21412 total outlay, 21412-14000 value = 7412 cost

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