Should I Lease or Buy a Car?
If someone asks you whether or not you should lease or buy a car what do you say? When you ask someone else whether or not it is better to lease or buy a car what do they say? It depends on who you ask!
The question to Lease or Buy a Car is an age old argument among the general population. This debate probably has more questions than answers. Since this blog is devoted to leasing cars, I think it makes sense for me to weigh in on the topic. My answer on whether it is better to lease or buy a car assumes two things:
One: you have a decent credit rating: (important whether you lease or buy a car)
Two: you drive 12,000 miles or less per year. (whether you lease or buy a car, mileage will still cost you money)
If you don’t meet either of these two criteria, buying is the better option. Assuming you do meet these criteria, is it better to lease or buy a car? Well, more criteria is needed to answer the question:
Criteria for Leasing vs Buying a Car
The Bias Against Car Leasing
Lease or Buy a Car Myths
As I touched upon on in, Car Leasing Myths, there seems to be a bias against those who lease cars, as opposed to buying them. Those who lease cars are often portrayed by car buyers as being impulsive, greedy and fool-hardy with their money, while they prop themselves up as being financially mature, patient and smart with their money. Merely asking the question, Lease or Buy a Car causes a leasing skeptic’s pulse to rise. The truth is that those who lease tend to be more secure, confident, but quiet in their ways. The non-lease crowd tends to have a spiteful outlook upon those who lease or refuse to pay cash for luxury items. Don’t ask whether or not to lease or buy a car: Just do what’s best for you. This is clearly not the mindset of many of our so-called, ‘financial experts’, such as Suze Orman, and her overly critical view that, ‘if you cannot afford it, don’t buy it. I won’t let Suze Orman tell me whether or not to lease or buy a car and neither should you. Besides, you lease a car because you CAN afford it.
Lease or Buy a Car if you can afford it
If You Can’t Afford to Buy it, Lease It
Personally, I am not about to let Suze Orman’s lack of appreciation for new cars guide what’s best for me, and neither should you. More importantly, her reasoning is illogical and foolish. She says, we shouldn’t buy something we cannot afford. That is precisely why we lease cars, Suze. Leasing makes cars affordable. The reason I lease a car is so I can make a low monthly payment that I can afford. I could just as easily choose a car purchase that I cannot afford as a much as I could choose a car lease payment that is outside of my realm. Leasing a car with an affordable monthly car payment is no different than buying one. We should only buy or lease what we can afford, either way. Furthermore, I wonder if Suze Orman has considered the safety and liability issues of older or inferior cars. Old cars are not only a liability for financial reasons, but for safety and security too. Even the most reliable cars can break down at inopportune times. Let’s face it, there is a reason the majority of cars only have a 36 month warranty. They become a repair, security and risk factor. Your car becomes a liability after five years, not just for repair concerns, but for safety and security. Nobody wants to be broken down on the road, particularly at night. If leasing, allow you to upgrade to a bigger car with more air-bags and a higher crash rating, you are making good practical, as well as financial sense. Older cars are simply not as reliable. That doesn’t mean you cannot get a good deal on a five year old car, it just means it’s past the age where you can compare your investment fairly to a new car with warranty. Oil Baron, John Paul Getty has been quoted saying this thousands of time, yet for miserly codgers like Suze Orman, let me state it again: “If it appreciates, buy it. If it depreciates rent it.” John Paul Getty (words to live by). Why?
Cars Depreciate like Crazy
Considering that cars depreciate and this depreciation accelerates the fastest in their first two years, it would make the most sense to buy a car that is two years old. So, to make a fair assessment of all viable car financing options, let’s look at a car lease vs. a 2-year-old car purchase, vs. a brand-new car purchase and see how they compare after a 5 year period. As you will see, the difference in the long-run is very negligible. The figures below are a few years old, but the same message applies with slightly higher MSRP values due to inflation.
Buy Versus Lease Face-Off
2009 Subaru Car Lease – 24 Month Lease
Capitalized Cost: $21,500 (agreed sales price)
Monthly Payment $231.00 x 24 = $5,544
Down Payment: $500
Total Cost after 2 Years: $6,044
Total Cost after 5 years: $14,360 (assuming lease payments on new car remain the same)
Repair Bills: 0
Net Cost after 5 Years: $14,360
2007 Subaru Car Purchase – 7%, 60 Months
Sales Price: $15,500
Down Payment: $2,000
Monthly Payment: $267.00
Total Cost after two years: $8,408
Total Cost after five years: $18,020
Repair Bills: Unknown (You can count on needing new Brakes and Tires by year-7)
Car Value after 5 Year loan is paid: $6,550
Net Cost after Car Value Equity: $11,470
2009 Subaru Car Purchase –3%, 60 Months
Sales Price $21,500
Monthly Payment: $351.00
Total Cost after two years: $10.424
Total Cost after five years: $23,060
Repair Bills: Likely to be very low in the first five years. May need Tires & Brakes
Car Value after 5 years: $9250
Net Cost after Car Equity: $13,810
How About Paying Cash For a New Car?
Lease vs Finance
If you have the money to do it, or you’re trying to impress Suze Orman, and it makes you feel good, fine. However, in my opinion, plunking down $23,000 of cash on a depreciating asset like a car is the very worst of all three choices above. Despite the $2,000 in interest you think you might have saved after 5 years, you have sacrificed a big chunk of your financial freedom and security by tying it into an asset that will be worth half of what you paid for it in just 2-3 years. There is a good reason it costs money to borrow money. See the Car Leasing Guide. That $23,000 cash you put down on your car is gone. If you lose your job and need the money, you’ll never get it all back, even if you try to sell the car a month later. Furthermore, while it may seem appealing to be saving on that $231, $267 or $350 car payment, what do you think you are paying each month in order to recoup that $23,000 that is no longer in your bank account? Despite all these drawbacks of paying cash for a new car, the majority of friends and relatives I know, who pay cash for cars, tend to be the most obnoxious about it. They tend to brag and boast about how macho and wise they are with their money for spending it all in one fell swoop, while belittling you for doing something so disastrous and irresponsible as leasing new cars every 2-3 years. But enough already, let’s answer the question:
And the Winner Is?
The 2-Year Old Car Purchase option appears to be the most cost effective after a 5-year period, but not so fast. That’s only if you assume no repairs. Two things you can count on needing are brakes and tires. However, just to be fair, you will save a few hundred dollars on registration costs by keeping a slightly older car. As you can see, the value of the car is slightly less after your five year loan is paid because the car is now 7 years old instead of 5. In both car purchase cases, you do have some equity remaining in your old car and that is what you gained by buying instead of leasing. This is not nearly as much as most people think. Besides the repair bills, the other factor to consider is the interest potential lost by making those higher purchase payments instead of leasing. When you add it all up, trying to determine the difference in real money saved by buying vs. leasing is like splitting hairs. Obviously, the example above will vary according to the make and model of car you chose. Two year old American cars will cost less money, but your liability increases in place of decreased reliability. There is a reason Japanese cars hold their value better. You pay for reliability in one way or the other. When you look at all of these factors objectively, the value of your trade-in is about equal to the extra amount you paid to own the car in the first place. The difference with the lease is that you are driving a brand new, reliable and safe car year after year after year. By now, some of you are asking, why not pay cash for a car and save the $2,000 in interest?
One More Question:
Is it Better to Buy Or Lease a Car?
If you value new cars, want to preserve your bank account and drive less than 12,000 miles a year, leasing is the way to go. Are you listening, Suze Orman and Dave Ramsey? We really don’t need you telling us what to do. Of course, this is a Car Leasing Blog, what do you expect us to say? You decide for yourself, and what makes you happiest is what’s right for you. If you have good credit and like driving new cars, you no longer have to answer the question of whether or not to Lease or Buy a Car. As is true with buying cars it helps to know what you are doing. Refer to my comprehensive car leasing guide and glossary of lease terms to help gain the knowledge necessary to be an effective negotiator.
Always start at the MonthlyCarLease home page to get the latest information on car lease deals. And, by checking the Monthly Lease Deals, you will always know where to begin a reasonable car lease negotiation. Finally, use my free car leasing calculators to help you appraise your quote lease offer or advertised special from your dealer.