Leasing’s biggest draw is the potential it presents to drive a more expensive car than you could otherwise afford to buy. However, it also gives you the ability to drive a car you can comfortably afford to buy for less money.
While there is much to be said for that, most financial experts will tell you it’s a false economy. After all, that money just allows you to drive the car — not own it. This ultimately means leasing costs more.
But does it?
Can leasing a car be cheaper than buying one?
How Leasing Works
Distilled to its essence, when you lease a car, you’re actually renting it from a leasing company for a specific period of time (usually between two and four years). You’ll agree to drive the car no more than a set number of miles — typically between 10,000 and 15,000. And, you’ll agree to keep the car in as pristine condition as possible.
All other things being equal, the primary factor driving the monthly lease payment is the perceived residual value of the car — or what it will be worth at the end of the lease term, assuming the parameters regarding mileage and condition are met.
Before you enter into the lease agreement, you’ll negotiate the price of the vehicle with the dealer, just as you would if you were buying the car. However, your monthly payments will be based on the difference between the negotiated price and the residual value — less the down payment you make. In other words, you’ll only pay for the depreciation of the car experiences during your lease period.
You’ll also encounter fees such as licensing and registration, sales tax, document fees, acquisition fees, disposition fees and interest on your payments. When the lease contract runs out, you’ll return the car, choose another one and start over again — or buy the car for the residual value.
How Buying a Car Works
You’ll negotiate the price with the dealer, just as you’ll do with a lease. However, your monthly payments will be based on the full price of the car upon which you and the dealer agree — less your down payment. You’ll also pay to finance the loan at an interest rate predicated by your credit score. Fees you’ll encounter include all of those listed above, save acquisition and disposition.
Here’s a look at a typical lease vs. buy transaction to see how significant the difference in payment can be.
Let’s say the car costs $24,500. In a typical scenario, the lease payment would be right around $300, and you’d encounter drive-off fees of approximately $1,500. You agree to drive no more than 12,000 miles per year over a three-year period. At $300 monthly, you’ll pay a total of $12,300 to drive the car.
Buying the same car, you’d likely finance the purchase over a 60-month period. To keep things as even as possible, let’s say your down payment is also $1,500. We’ll assume you have a good credit score, which should net you an interest rate of right around 4.9 percent (as this is being written). Plugging those variables into a finance calculator, we find your monthly payment would be $433.30. Multiplied by 60, you’ll pay a total of $25,998 — however, you’ll own the car at the end of that period.
Meanwhile, that $12,300 you just paid dissipates into the atmosphere.
So, Buying Wins?
When you take into consideration you’ll have a tangible good with monetary value at the end of the term, even though you’ll pay less up front with a lease, you come out ahead in the long run with a buy.
However, if you use your car for business, that lease payment becomes a tax-deductible expense. Leasing also keeps you in a new car with a warranty and all of the latest features. Further, with a lease, you’ll have $133.30 extra in your budget you could put away each month. At the end of that five-year period, you will have saved $6,498.00 (assuming you paid $1,500 to start another lease at the three-year mark). Invested, that amount could deliver a return pretty close to the $9,500 that five-year-old car would be worth.
So, with all of that said, can leasing a car be cheaper than buying one?
It all depends upon your outlook. Going strictly by the numbers evident, buying appears to win. However, when you consider tax deductions, investment opportunity costs and the value of worry-free motoring, leasing is quite competitive.
Ultimately, the choice depends on your needs and situation.