Are you considering leasing a car? Many people lease their cars instead of buying them. Personally, I don’t get it; I have always bought cars and held onto them for a decade or more. Why lease?
Recently, three friends indicated to me that they all lease their cars instead of owning them. Naturally, I asked them why they lease the cars instead of buying them outright. They all had similar answers. They want predictable monthly payments, they like driving new cars not only for the prestige, but also for the reliability aspect; they all indicated that as cars age, the upkeep expenses really start to add up.
Why should you lease?
Let’s crunch the numbers. Today, according to Edmunds.com, the average mid-sized car lease is based upon a car which sells for $24,775. The typical “drive off” fee on such leases is about $1,154. The lease payments on a three-year lease would be $294.00 per month. So the cumulative expense after three years would be $11,738. After which time, you would trade in your leased vehicle and presumably lease another car. For simplicity’s sake, let’s assume that the cost of the new car and the lease terms would be the same that they are now, so the total six-year expense for leasing two cars (each for three years) would be $23,476. (Of course, the cost of a new car and presumably the cost of future leases would be higher than they are today, but again, for simplicity’s sake, we’ll just use today’s figures.)
Why should you buy?
Now let’s see what it would cost to buy the car outright. Again, using data from Edmunds.com, we see that the average down-payment on a five-year car loan is $4,104 and the monthly payments on that loan would be about $400. So the total cost to buy the car would be $28,104. It would cost you an additional $4,628 to own the car than it would to lease your cars.
After year six, you would have to turn in your leased vehicle and secure a new vehicle with additional costs. Thus, after nine years (and three leased cars) your total expenses for your leased cars would be $35,214. (Again, we’re just using today’s dollars for this example; the actual costs would likely be higher.)
The costs to the buyer would not increase; their total expenses would remain at $28,104. Therefore, the nine-year cumulative costs for the leaser would be about $7,000 higher than for the buyer. Before you jump in, I hear you… the buyer is going to have additional expenses to maintain their car. After six years, parts start to wear out and need to be replaced. These costs can certainly start to add up. Again, using data from Edmunds.com, the average annual expense for auto maintenance is about $400.
Don’t forget those expenses…
Edmunds has a nifty tool, True Cost to Own, which includes all the expenses incurred to own and operate your vehicle. For this example, I used the 2015 Honda Accord Touring V-6 4-door sedan. Edmunds projects that this vehicle will incur $2,104 in maintenance expenses over its first 5 years of ownership; the bulk of which coming in the 4th year of ownership.
So if we add that $421 annual maintenance expense onto the 9-year cost of ownership, the total expense increased to $31,897. That lowers the difference between owning one car for nine years and leasing three cars for three years each to just $3,317. Over course, there would still be some residual value remaining in the depreciating asset that you would own. We can probably assume that there would be about $3,612 in trade-in value, based upon data derived from kbb.com for the trade-in value of a comparable car. That means that, on average, it would be about $7,000 cheaper to buy a car and own it for 9 years than to lease three cars. Is that worth it? I guess that decision is up to you?
Buy or Lease?
To me, buying a reputable car and spending $7,000 less out of pocket is a better deal. To others, getting a shiny new car every three years and not having to think about maintenance issues is well worth the added $7,000 expense (which is less than $800 year). To each, his or her own, right?
Debt is a four letter word
I am somewhat debt averse; I try to have as few debts as possible. That is, I try to pay off my mortgage as quickly as possible and not maintain any other debts. That includes car loans. Instead of paying for a car with debt, even debt at incredibly low interest rates, I’d rather pay for the car that I purchase with cash and have no debt at all. My friends like having predictable monthly car payments – several hundred dollars. I like having a predictable monthly car payment as well: zero! Most people say that they don’t have the cash to pay for a new car. I suggest that everyone can have the cash to buy a car. How? Plan for it. Put money away. If necessary take money out of your investments, but preferably put money aside specifically for your next car purchase.
Save even more money
Do you want to save even more money? Buy a used car instead of a new car. Edmunds.com suggests that the average price of a similar 3-year-old midsize sedan is $15,688. The average interest rate is much higher though on a used car loan, than on a new car loan: 6.04%. The average down payment is $2,304. The monthly payment is $301. The six-year out-of-pocket expenses for a used car are $20,364, compared with the new car expense of $28,104. So you could save even more buying a used car and perhaps replacing it every six years.
Speaking of how long to hang on to your car, I try to keep my cars longer than nine years. My wife drives a 17 year old car; it’s in excellent condition! And I have an 8-year old car. I expect that we’ll be driving these cars for many years to come. We pay cash. We buy high quality, reputable, dependable cars.
If you want to lease a car, have at it. You will likely spend more than someone who buys their car, but you’ll have yourself a new car every three years. Oh, one more thing about leasing cars. On rare occasions you will have to pay for general maintenance expenses on your leased car. It’s rare, but it does happen. A friend just spent $1,400 on brakes, etc. to repair his leased car. What’s worse, he incurred these expenses just one month before his lease was due to expire. He knew this was an unfortunate expense, one which he normally would have elected to not incur, but he has two long trips planned during the holidays, so he wanted the car to be in tip top shape. If I were him, I would have rented a new car for those trips. I can state with a high degree of confidence that the cost of those rentals would have been far less than the cost of his repairs.