Getting a new car? Should you lease or buy?

The discussion of lease vs. buy has been discussed in various publications over the years and I am not going to bore you with the basics of a lease vs. buy analysis. I just want to write a little bit about my experiences with buying a new vehicle and hopefully some of my readers can relate and provide some feedback.

I will attest that the starting point of acquiring any new vehicle should be based solely on choosing the car you want to drive for the next 4 years or so, not based on manufacturer rebates, cash incentives, 0% finance rates and so on. Making a decision on that basis will undoubtedly ‘get’ you into a car that you will likely regret 1-3 months after acquiring it. Focus on the car you want and then look for every possible avenue to acquire this vehicle, whether it’s new, used or certified.

From a purely financial point of view, it is easy to prove that purchasing a vehicle is more cost effective than consecutive leases if you plan to drive the car long-term and you do not encounter serious maintenance issues. However, I, along with many other buyers, look at variables that have nothing to do with finance when buying cars. There is also value in the option of driving a new vehicle every 3-4 years, not having to worry about paying for service costs and so on.

To provide a very simple example, I will compare the cost of leasing versus buying if you:

1. lease a vehicle that has a $20,000 MSRP for 3 consecutive terms of 4 years each, with a 50% residual at a 0% lease rate; or
2. purchase the same vehicle and drive it for 12 years. 

Under a lease you will pay $30,000 to drive the car for 12 years, and under a 0% finance arrangement you will pay $20,000 to drive the car for 12 years. I have not built in maintenance costs or fair market value (FMV) of the used vehicle after 12 years, but holding these factors equal, you have saved $10,000 in this example.

Clearly if you are looking to buy a car and drive it for 12 years you need to ensure you do some homework and buy a car with low maintenance costs and high reliability. If you are leasing a vehicle, these factors are not relevant because most likely all maintenance costs, with the exception of wear and tear will be covered by warranty in the lease period. Once you start to cloud the formula with interest rates, expected maintenance and so on, you may end up with a different answer.

Over the last 20 years or so I have owned approximately 10 different vehicles. When I add up the cost of what I paid for those 10 vehicles, it’s about 5 times higher than if I had driven each car for 10 years. It’s not uncommon to see cars on the road that are 10 plus years old and, if they are well-maintained, they can look almost brand new. Each time I leased or purchased a vehicle I knew that I was only going to drive it for 2-3 years before I got bored and wanted something new.

This is where the advantage of a short-term lease comes in. If you don’t plan on driving the car for more than 3 years, a lease is your most cost effective option because it allows you to walk away after 3 years versus having to sell the car to the dealer. The lease arrangement builds in a residual value that should approximate the FMV of the vehicle after 3 years, but based on my experience the residual is typically higher than the actual FMV and therefore you will pay less in the end than you would have if you bought the vehicle and sold it after 3 years.

To further complicate the matter, several manufacturers have discontinued the practice of leasing vehicles and are pushing customers into a strong finance arrangement. This comes back to my discussion earlier on with regards to first starting with the car you want and then looking at how to structure the deal. If you are adamant that you want to lease a car and the manufacturer does not offer a lease, there is always the option of leasing from a third party leasing company. This option will cost more, but it will give you the option of moving out of your car earlier.

-- David Hertzog