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Leasing vs. Buying a Car

My family has always bought cars, used them until they've become "old" or "not worth it" anymore (about 8-10 years). Right now, with the 2005 Touareg and the 2001 Aztek, Carey and I are on an "eight-year plan" - get a new car every four years, use them for eight years, and trade them in.

Years ago I read two books by the same author, "Live Rich" and "Die Broke" (which, I believe, were written/published in reverse order). The author recommends leasing cars because he believes it's more cost effective. Plus, he admits, you can get a new car every three or four years.

My parents grew up in an era where people would often fix their own cars and keep them running for a long time, in which case buying made sense over leasing. Carey and I don't travel very far, so a 15,000 mile yearly limit wouldn't matter, and we could easily bring a car in for service when required. We're not forgetful people.

Assuming a $600 monthly payment on a five-year loan, that's $36,000 to buy a car. If the car lasts eight years, that's $4500/year. If you're leasing, that's $375 per month. So, if a lease is 40% cheaper than a loan, it makes sense to lease, I suppose. It may even make sense to lease at 30% or less, because over eight years, there will be maintenance costs not associated with a leased car.

Does that math make sense? What do you do: lease or buy? Why? Are you thinking of doing it differently?

Here's a poll, but it'd be much more helpful if you can provide longer answers in the comments below.

Lease or Buy a Car?
View Results

19 Responses to "Leasing vs. Buying a Car"

  1. Your math is off. Remember, you can actually sell a car you own. Assuming that after those five years are up, you sell the five-year old car, you subtract that amount from the $36,000 you spent to see your total cash outlay for the car over that five-year period.

    Seriously though, you should consider buying lightly used cars, especially certain makes/models that lose their value very rapidly over the first few years, like Saab, Audi, and the like. My car lost over 40% of its value over a three year period, and I bought it used with only 40 thousand miles on it. I financed it for three years, and I have a payment far lower than that of a lease, with none of the restrictions. In four years, I can sell it, and repeat the process.

    As most people will tell you, leasing is rarely a good option from a *financial* perspective. However, if you hardly ever drive, and care a lot about driving what people perceive as a "nice, new car", and want the convenience of not worrying too much about maintenance, its not a terrible option from a *convenience* perspective.

  2. Jonathan LaCour said on June 22, 2007:

    Remember, you can actually sell a car you own.

    I'm assuming that the value of an eight-year-old car is pretty minimal, even if it did cost $30,000 to begin with, or that it will, if nothing else, simply offset the added maintenance costs of years 5-8. And because I don't want to get into a discussion of this sub-point, I'll leave my response to that.

    As to whether it makes sense from a financial perspective, well, my recollection of the advice from the financial books mentioned above is that leasing is the better way to go. That's why I'm asking the question.

  3. I lease and sell.

    The last two cars we've had were leased and sold for more than the value we had to pay back to the dealer.

    This next one (Subaru Impreza Wagon) is going to go for around 14K$ (canadian dollars) when I'm done with it (in 3 years) but the price I have to pay to the dealer is 10K$...

    So that means that every 4 years, I upgrade!

    Ok, I have to go through the hassle of selling the car but I think it's worth it.

  4. Haha, my reason has nothing to do with math or money... I don't want a leased car because I don't own it, therefore I can't do what I want with it. I've owned both used and new cars.

    I tend to customize the wiring in my car a bit as far as adding Bluetooth, iPodness and such, and I'm sure the dealer wouldn't take it back after the lease period if they saw what I did to it. I find that my cars have great resale value though, due to my modding.

  5. I buy new every three or four years. I put too many miles on to consider leasing.

  6. I own my current car, but, this is the first car I have ever owned, I was very concerned when looking at buying this car that I was going go over the mileage and attract some horrible penalty for going over. However, 1 year after buying this car (almost one year to the day today) I have about 7500 miles on the car, that's WAY under what a lease would cost me. I'll have this car paid off in a few months (18-month loan I think) and then i'm going to give this to my mother and lease a new one.
    Leasing makes far more sense to me, I really don't want to have to deal with selling the car later, or deal with maintenance of it. In fact, for that reason it's entirely possible my next car will be a BMW, just because they are 100% no-charge covered for the lifetime of the lease for all maintenance, even routine stuff like oil changes or even fluid fillups (but I'm competent enough with cars (just) to fill up my own washer fluid ;)).

  7. The following article on a leading car site comes to the same conclusion as the financial expert I read/listen to (Dave Ramsey):

    Edmunds.com - Compare the Costs: Buying vs. Leasing vs. Buying a Used Car

    Summary:

    Options in order of most expensive ways to operate a vehicle:
    Leasing
    Buying New
    Buying Used

    Lesson: Let someone else drive the car when it losses it's value the most.

  8. Buy new. My current car is 6 years old and still like new, 77,000 Km (48000 miles) on the clock. I plan to keep it another 10-14 years at least. I figure less than $200 a month.

    After 20 years the 'buy new' vs 'buy used' is pretty moot I think.

  9. I lease.

    I don't drive many miles and I dig on new cars. Having said that I pay less per month (for 36 months) and I get more car for it. At the end of three years, I park the car and go on to the next one.

    Buying for me means having a five year loan. After that, if you sell it, why didn't you lease? If you keep it, say for five years, you'll have to cover maintenance, since the warranty is gone. Add to that the money you'll need to save from your down payment on the next car, you will have the same amount of cash that you've had from your payments to buy the next car.

    However, if you drive a lot of miles or if you can afford the car in cash and/or with a huge down payment, it makes more sense to buy. For me the added bonus of leasing is that I can't change the car for three years (and if I bought I know I'd be in a new car every 12-18 months!)

  10. Just sending in the last payment on our 5year plan on the new car we purchased. It's a nice feeling to have the thing payed off and be able to put that money toward something else or just to save it.

    We did buy this with 0% financing, a huge factor for us. We probably won't buy a new car that doesn't have this incentive.

    We bought our other car used, it's been paid off for at least 7 years. I hope to get another 6 months or so out of it, it's a '93. The maintenance on it has been less over time than any lease price that I can think of (even after putting in another engine 2 summers ago.

    My 2 cents.

  11. Like others have said, it really depends on your situation, your wants, and your needs. For me, leasing does not make sense because I put too many miles on a car: 25k miles a year on the TDI, and 13k miles a year on the 1.8T, for a total of 38k.

    And, I don't need the latest and greatest.

    I'm planning on keeping my 2003 VW Jetta 1.8T for at least 10 years, which would mean it would have approximately 125-130k miles on it. I plan on keeping the TDI also for at least 10 years, which means it will have 250k miles on it. If I still like either of these cars at 10 years, I'll keep on driving them.

    Why? Because it's always cheaper to fix a car than it is to buy a new one. If the engine is the first thing to go in my 1.8T, I'll probably just get a new engine.

    If you instead choose to buy used, that changes the equation certainly.

    For me, I'll never lease since it just costs too much, over the long run. Also, my plan is to eventually get out of car loans, and to pay cash for cars in the future. I plan on doing that from now on, so if either the 1.8T or the TDI needs replacing, I'll be getting a junker that I can pay cash for, until I can afford to pay cash for a nicer car. This way, compound interest will work for me instead of against me. If your plan is to take out 5-year car loans for the rest of your life, leasing might well be worth considering. Even if you do plan on having car loans forever, I would recommend you consider shorter loans - preferably 36 months or so, but 48 months max.

  12. The comment about 8 years later the car being worth next to nothing depends on the car. My father bought a used '94 Corvette in 2004 and happily paid 18K for it, slightly under half of what it was originally sold for, 10 years later. Car was very low mileage and looked showroom new. Crazy part is, even now with the additional miles he's put on it, he could still sell it for only slightly less than he paid.. then turn around and buy a '97 for 18K again. Bam, 4 years of driving a very nice car and you've spent what.. 4 grand?

    The depreciation of the car model (and of course, how well you've taken care of your particular car) comes into play when selling. If you're smart about it, you could drive a nice car (i.e. a 60,000 corvette) for 4 years for what it might cost to buy and maintain a piece of shit for the same amount of time ๐Ÿ™‚

    Anyway, to answer your question, while leasing makes sense if you REALLY enjoy having a truely new car.. it's not cost effective and you're paying alot for that priveledge. I agree with the posters above that have said "let someone else own the car while it loses most of its value". Buying a 3-5yo used car IS still buying a "new" car if you are smart about it, and you won't be paying for the hype of the latest model. It's the same issue (more or less) as renting vs. buying a house, and I don't know many people that are renting at 40. It is always more financially sound to put your money toward something you will eventually own and can turn around and sell. Just make sure you pick a car that will keep it's value, and you will come out on top.

    Something else to think about is insurance and monetary considerations if (or when) you wreck the dealership's car ๐Ÿ˜‰

  13. If any of you reading this think leasing a car is "a good idea" your either on drugs or can't do math. Sit down with a calculator and do the math properly and you will very quickly see it is the most expense way of operating a car. Your paying to rent a car! Thats just STUPID!

  14. Actually.. saying "your" when you mean "you're" is stupid. Whether or not leasing is stupid depends on the situation.

  15. No Andrew YOU'RE no hearing me, its just stupid. If you want a car save up the money and go buy a car with cash, don't go lease a $30,000 car or get a loan! If a person is old enough to sign their name on a loan or a lease for a car, then they shouldn't be acting like a child with the "I want it! I need it now!" attitude. No one will loose their job or go to jail if their driving a 10 year old thousand dollar wonder. The only reason why a person should have a new car is if they can afford to loose the 60% value over the first 4 to 5 years that a new car looses. On a $30,000 car 60% is $18,000! Congrats your 4 year old car is now worth $12,000! THATS STUPID! Thats why you don't get a loan and if you do the math you'll see that leasing a car is even dumber because your not even trying to buy the car you're renting the car. The only person that wins in a leasing situation is the dealership and the guy walking into the dealership buying with cash the 3 year old car that was leased by some other idiot who took the beating on its value. And I guarantee that if I walked into a dealership with a pocket full of one hundred dollar bills and made a cash deal, I WILL get a better price then if you or anybody else tries to finance that same car. Cars are the most expensive item anybody will buy that will go down in value. Why be the idiot that "owns" that car while its loosing most of its value? Go to the websites below and find out about how a lease works (if you don't know) and then use the calculator on the other site to find out the monthly payment on a lease, then take that payment and multiply it by the lease term and you will see that its probably close to the value of the car that you want to lease, meaning that if you saved up that monthly payment for the same amount of time as the term, by the time you got to the end you could walk into the dealership cash in hand and by the car you wanted to lease.
    How Leasing Works:
    http://www.leaseguide.com/lease07.htm
    Lease Calculator:
    http://www.calculator.com/pantaserv/lease.calc

  16. Mike said on September 26, 2007:

    The only reason why a person should have a new car is if they can afford to loose the 60% value over the first 4 to 5 years that a new car looses. On a $30,000 car 60% is $18,000! Congrats your 4 year old car is now worth $12,000! THATS STUPID!

    Mike, that's an incredibly - dare I say it? - stupid way to look at having a car. So a car loses $18,000. It's not an investment. Of course it loses value - but it provides value as well. It gets us where we need to go, it hauls the stuff we need to, and so on. For many people, a car provides enjoyment and other feelings, not to mention safety: a 10-year old $1k wonder is probably not going to offer the safety features of a modern car (not to mention the comfort, convenience, and style).

    As I said, leasing can make sense when the rate is low enough, and a loan at 5% or even less is almost never a bad thing: you can usually find something worth the 5% cost for your freed up capital.

    Besides, I too would have trouble taking financial advice from someone who says "your" and "looses" when they should say "you're" and "loses."

  17. Mike, leasing a car is certainly the most expensive way to operate a vehicle, but that does not mean it is "stupid."

    For people who want a new car every 2-3 years, and there are a lot of people for whom that is the case, leasing is the best option for them. It's certainly much cheaper than buying the car and selling it a couple years later.

    You are correct that the cheapest (but, again, not necessarily the best - see the previous paragraph) way to operate a vehicle is to pay cash for one (and, a used one at that).

    People are in different situations (needs, desires, budget) when it comes to operating a vehicle, and there are different solutions for those different situations. Just because leasing is not for you (which is fine), that does NOT mean it is "stupid."

    PS - please learn the difference between your/you're, and their/they're/there. Misusing those makes you look stupid. You might want to start here.

  18. Hi everyone,
    After reading the above posts--I still don't know if I made the right decision leasing my car. I drive moderately (I just found a local job), and I plan on moving to SF, which, if I do, I'll be using public transportation majority of the time.

    I leased a 2008 Honda Civic for on a 4 year lease, paying $247/month, 15K miles/year.
    Having a new car wasn't a huge factor, but I wanted a safe and reliable car (thats somewhat cute, which it is), that wouldn't depreciate so much in value).
    I wanted my monthly costs low and a low downpayment (I just started my career 1 year ago).
    The car is $17, 180, and during those 4 years I will have paid $3300 in interest.

    My question: At this point, should I keep this car until its time is up at 4 years then turn it in, sell it in a couple years or buy it at the end?

    I would hate to have made a bad decision and wish I did some more research...

  19. You simply have to be able say 'no, thanks at that price' at least once to the dealer. This gives them a strong message that you are serious about your research.

    You should also bring a piece of paper to the dealership and make sure you do all the math of the finance calculations yourself. The point is not that they will do the math wrong. The point is you will see exactly how the deal is structured. Do not be afraid to take the time to do this or look like a fool for mapping out your car deal in the dealership.

    My dad swears by this process, http://tinyurl.com/nxutm2


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