People often ask me “What’s better, leasing or buying?” or “Why do people lease?” What they should be asking is “Which way is smarter?” It appears that leasing is not getting the billing it did in the past. My answer to them is “It depends on a couple of factors”. I think long term leasing of a vehicle, 48 months or longer, should generally be “No”. Short term leasing, 36 months or less, should generally be a “Yes”.
If you normally trade cars every 4,5 or 6 years then I think that leasing can work out better then buying a car or truck.
When you buy a vehicle everything is pretty much great for the first 36 months or so. After 36 months you start to do repairs and maintenance.
Tires, brakes, tune ups and possibly more, a lot more. While you are still making monthly loan payments. In most cases any remaining warranty is on the power train only.
It’s your vehicle and your choices are fix it or trade it. If the resale is poor on the unit you own it’s your responsibility. If it has been in an accident or repainted or it’s just a bad seller in the market now, it’s still your problem making it difficult to haggle on your trade value. If you financed the vehicle like most people, you still owe 24 or 36 payments that are your responsibility. You can decide to fix and keep the vehicle when ever it breaks. It becomes more of a concern as the vehicle gets older because it now has approximately 50-60 thousand miles on it and it’s certainly not the latest technology. What about the way it looks? I am sure that is important a little bit, as well.
Now let’s take a look at this as if you had leased your vehicle for 3 years or less. Using 15,000 miles a year as a usage factor. Any mileage amount that is over 15000 a year or 45000 for 3 years, is charged at a common 15 cents a mile at the end of the lease. If you think you are driving more then 15000 miles a year, build the mileage into the lease. These publications say the average American will drive 12000 miles a year making a lease look even better. Publications: American Cars, Personal Finance, Travel & Places.
At the end of your lease, one thing is for sure, you have choices if you want them and you don’t have obligations. You can purchase your lease vehicle, if you want, for the residual value when the lease is over. I mention this just in case the vehicle has some special value to you.
If you want a new car or truck because it’s fun to get a one, you can. If your needs have changed because you have a bigger or smaller family, a different job, longer distances to drive, you are in a great position to make that change. You don’t have to haggle over your trade and you haven’t even paid all the sales tax you would have paid if you purchased. In most cases, you have not paid for new brakes or new tires or a tune up or shocks. If it has an accident record or the market has killed the resale value, you are still OK because you can just hand over the keys to the leasing company and walk away.
What about the deal dollars? A three year lease on an automobile with a good market standing and a sticker price of about 24,000, will run about $350 a month for 36 months without putting any money down.
If you purchase that vehicle the payments over 66 months are about 450 a month at a rate of 5.99%. That means over the first 36 months you paid about $100 a month more then the lease customer. At that time the lease customer can buy the leased vehicle for $12000 plus the sales tax, $12900 total or they can walk away and get a new car or truck (I used 50% as the residual value). The lease customer has purchased only gas and oil changes up to this point.
The purchasing customer has a balance of 13500 and has paid out $3600 more (100 a month). Both customers owe about the same money but the owner who purchased is looking at repairs in the future and the responsibility for what ever the resale value is at that time.
What about the buyer who pays cash? That customer has laid out approximately $25500 including tax. About $12500 more then the lease customer but they own the vehicle that is now 3 years old.
If that customer had left the 25500 in the bank they would now have about $27000 in the bank. If they placed the $25000 toward their home mortgage, (estimating a $250000 mortgage) they would have eliminated approximately 100 monthly payments for a total of $125000. I know that sounds high but each monthly payment in a mortgage deducts about 10 percent of the payment from the mortgage principal. If you put that cash toward your mortgage and keep the payment the same you would eliminate as many as the last 100 payments
There are other advantages to leasing, especially these days with all the technological changes. Your car is always under warranty, You avoid trips to garages, you get the added piece of mine because your car is always newer and so on and so on.
What about the downside of leasing? There are a few. You have to keep your mileage inline with your lease agreement or you will pay extra. That is true but when you put more miles on a car or truck that you own it also costs you money because the increased mileage makes the trade value less and you experience more repairs. Another issue is the term of the lease. Do not lease for over 36 months. If you lease for more then 36 months you will begin to experience repairs you must pay for
If you normally keep your vehicle 8 or ten years then buying would be the lowest cost, most likely, assuming your repairs aren’t exorbitant.
Vehicles aren’t like houses, land and gold. These items appreciate so purchasing instead of leasing makes for a good investment. Vehicles depreciate and many smart accountants and wealthy investors will tell you to lease the things that depreciate. When you are shopping, get figures both ways and compare the numbers but also, compare the advantages.