9

In today's low interest environment, is it generally more economical to buy or lease a new car? Assume above average to excellent credit and an average priced new sedan. I ran through a cost comparison in my finance class last week, but the numerical assumptions in the book were somewhat out of date. Any insights would be much appreciated!

EDIT: Would anything change if you buy a car with a high expected residual value?

  • 1
    Are you leasing the car based on MSRP, or a negotiated price? – Michael Oct 23 '15 at 19:57
  • 1
    There are some tax differences on a lease. I am not knowledgeable on details but they apply differently to individuals and businesses and can be an advantage in certain circumstances. – Freiheit Oct 23 '15 at 20:03
  • 1
    @Michale Definitely negotiated, with the strategy of negotiating as if purchasing, and then asking about a lease. Btw has anyone have a sense of how much car lease prices are negotiable? – lesnikow Oct 23 '15 at 20:22
  • 1
    @lesnikow Exactly the same as if you are buying. – Andy Oct 23 '15 at 22:53
18

It's my understand that leasing is never the better overall deal, with the possible exception of a person who would otherwise buy a brand new car every 2 or 3 years, and does not drive a lot of miles.

Note: in the case of a company car, Canadian taxes let you deduct the entire lease payment (which clearly has some principal in it) if you lease, while if you buy you can only deduct the interest, and must depreciate the car according to their schedule. This can make leasing more attractive to those buying a car through a corporation. I don't know if this applies in the US.

The numbers you ran through in class presumably involved calculating the interest paid over the term of the loan. Can you not just redo the calculation using actual interest and lease numbers from a randomly chosen current car ad? I suspect if you do, you will discover leasing is still not the right choice.

  • Thanks for your answer Kate, that is some good info. I will redo it with a lower interest rate, but if that number is off, I suspect others might also in the book. For reference it's Personal Finance 4 by Gitman, et al. So I wanted to see if other people got: buy used > buy new > lease new and especially how much is the margin between the three options... – lesnikow Oct 23 '15 at 14:45
  • 4
    You can't just substitute the interest rate. Find purchase prices and lease prices for the same car and substitute all the numbers. The difference among the options depends almost entirely on how long you want to keep the car. The lowest cost approach is to buy it and then keep it for much longer than the term of the loan. Eg 4 year loan and keep it 10 years. Yes you will pay for repairs, but typically about 2-3 times the monthly loan payment will cover a year's repairs. So run your calculation over various lengths of keeping the car too. – Kate Gregory Oct 23 '15 at 14:48
  • 2
    I have owned 4 or 5 vehicles(sometimes two at once) in my 40 years of driving. They don't all make it to ten years, but 8 or 9 at least. Once any given repair gets over $1000 I get rid of the car. That should happen at 10 years, but anyway hasn't happened before 8. I'm not making numbers up, I'm reporting my experience. – Kate Gregory Oct 23 '15 at 23:01
  • 1
    I am not sure why you would answer without listing examples and numbers. You are basically saying, believe general statements that people make. There are also a lot of factors including resale value, the kind of car, country, the down payments, the credit the person has.... This is basically leasing is wrong... just because. – blankip Oct 24 '15 at 5:03
  • 1
    I think this is generally true but there may be weird situations that are different. For example, the government rebates on electric vehicles caused some really weird "lease vs buy new vs buy used" calculations in the past few years. – enderland Oct 24 '15 at 14:49
9

The most economical way is to save your money, and buy a 1+ year old used car with cash.

  • 5
    Sorry but if a company is willing to give me an interest rate less than what I get as a market return, I'm not better off buying with cash. – corsiKa Oct 23 '15 at 17:18
  • 5
    @corsika: Jusy be sure they haven't hiked other costs to make up for that low rate. See other answers re negotiating car prices. – keshlam Oct 23 '15 at 18:03
  • And there are issues of risk. Loan rates are usually fixed, while returns on an investment are highly variable. In any case, if you REALLY want to save money, buy a car that's 5 or more years old. Sure, you'll spend more on maintenance, but in the long run you'll save a lot. – Jay Oct 23 '15 at 19:03
  • @corsiKa - find me a zero risk market return greater than an interest rate on a loan from a bank, then get back to me. This cannot exist, DUCY? – EkoostikMartin Oct 23 '15 at 19:19
  • 2
    @lesnikow: If they're giving a "promotional interest rate" that low, it's just a substitute for discounting the price. They would be just as happy (if not more) to discount the cash price by the same amount if you negotiate well. – R.. Oct 24 '15 at 5:34
6

There are two reasons leases are generally a worse deal than buying.

First, inherent in the lease is the concept of trading in the car at the end of the lease term. As we all know, cars depreciate the most in the first year or two. By repeatedly leasing cars on short time frames, you own the vehicles during those most expensive years. Of course there's nothing stopping you from doing the same thing when buying (be it via cash or loan), but leasing builds in a schedule and encourages you to stick to it.

Second, it is easier for the dealer salesperson to hide things from the consumer in a lease contract. Most salespeople will try to get a car purchaser to focus on the monthly payment, or they'll four-box the purchaser, but even then there's only 4 numbers, and most consumers have a rough idea what they are and what they mean. But in a lease the numbers in question are renamed and obscured. "Price" becomes "capitalized cost". "Interest rate" becomes "money factor" and is divided by 2400, making it look really small and not easily translatable without a calculator or pencil and paper. "Down payment" becomes a capitalized cost reduction. There's a new concept "residual value."

Neither of those reasons change when interest rate is lower.

1

I love car leasing.

Not because I have ever leased a car, but because it produces a vibrant market of 3-4 year old cars with low mileage and strong seller guarantees.

All of the cars my husband's family, and now I, buy are about 3 years old and have around 30-40,000 miles, and are about half the price they would have been new. Total cost of ownership is much lower, despite repairs.

Unless you get to lease the car with pre-tax money and live in a really high tax country like Germany, buying "certified pre-owned" is going to put you ahead financially with a lower level of risk than buying private party. Private party is even less expensive, provided you can have a trusted mechanic check the car out before you're committed to it.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.