Americans love a good rivalry. Yankees vs. Red Sox. Coke vs. Pepsi. Republicans vs. Democrats.
And … leasing vs. buying?
Leasing a car is sizzling hot right now. New data show one out of every three new cars is leased. And leasing may very well rule the future, as it shot up 46% over the last five years among millennial new car buyers. To those who think leasing is always a terrible deal, this is a travesty. To leasing fans, it’s vindication.
The topic of car leasing brings out a lot of emotion in drivers. Many people think leasing is non-sensical because after making payments for three years, consumers own nothing. But, in reality, that’s an inaccurate assessment and whether or not you should lease depends — not only on the driver’s needs but on those of the auto industry. Sometimes car makers offer incentives that make leasing attractive. So those who dismiss leasing outright could be missing out.
(This story first appeared on Credit.com. Read it there.)
The truth is, leasing is more expensive than buying most of the time. Buying a car from somewhere like Chevy Tahoe Car Dealerships is usually cheaper than leasing as the average American keeps a new car for six-and-a-half years, but a 2012 survey found Americans intend to keep their cars for up to 10 years. In either case, buying will probably be cheaper than leasing because when you buy a car, the monthly payments will eventually stop. Pay off a car loan, you keep the car; pay off the lease, you just get another. So the longer you intend to keep a car, in general, the better it seems to buy. It is particualrly important to buy your car if you are thinking of editing or upgrading it. Some people are really into adapting their car, whilst others worry that it might become too expensive. However, there are a load of deals that you could use that could help you to save when it comes to buying car parts (such as these JC Whitney coupons). This way it is better to buy a car instead of leasing it.
However, even in that equation, there’s a hitch. My four-year-old Toyota Rav4 needed a new transmission recently, as is typical of Rav4’s. (I found that out too late.)
As a high-mileage driver, I was out of warranty, and out of luck. My repair bill was $5,000 (Toyota kicked in $1,000 after I complained). That kind of repair bill meant I lost the leasing vs. buying lottery.
The big advantage that leasers have is similar to the advantage that renters have over mortgage holders: no surprise repair bills. As long as drivers stay within mileage limits, anything that happens to the car is generally covered under warranty. One reader put it like this:
“I’ve been leasing for about 10 years now. No unpredictable repair shocks to my wallet because I’m always driving a new car,” she said.
Of course, the mileage cap is the other big factor in the lease vs. buy equation. People with a long commute or who like to travel shouldn’t lease. Generally, leases limit drivers to about 1,000 miles per month. Exceeding the limit is expensive from 10 to 30 cents per mile. But the mental drain of watching your miles every week is also a drag. Imagine turning down a chance at a road trip because you are afraid of your mileage cap. This element is especially critical because dealers have been sweetening lease deals lately with even more complex (i.e. lower mileage caps) lease arrangements.
One factor often cited as a reason to buy is a bit of a red herring: equity. It’s usually stated something like this:
“With buying, you own something of value after you pay off the loan. With leasing, you have nothing at the end.”
While that’s sort of true, it’s not very true. First of all, cars are terrible assets. They lose value quickly, and in unpredictable ways. The value of what you own after making four years of loan payments is up for debate. In the end, I find most five or six year old cars are worth a few thousand dollars as a trade-in at a dealer. Perhaps Kelly Blue Book value suggests your car is worth X. but what actually matters is the money you get when you need it. Used car sales are so clunky that it’s silly to use those lease vs. buy calculators and feel vindicated that you’ve saved $982 by buying vs leasing after five years. You might give all that value back to the dealer when you get wholesale value instead of street value for your car.
In the end, people want (and need) reliable transportation and few surprises. So you can see why leasing is attractive. But here is a thorough list of the good and bad of leasing vs buying.
Why leasing might be better than buying
Less sales tax: You don’t pay sales tax on the full price of the car, but rather only on the value of the car you use during the lease. (If you buy the car at the end of the lease for its established ‘residual value,’ you’ll pay the rest of the sales tax.)
Tax benefits: For some folks, leasing is a much easier tax write-off.
Luxury: You’ll probably be driving around in a nice, new car every three years.
Feels cheaper: Your monthly payments, and your down payment, will probably be lower.
No repair surprises: Fear of big repair costs will definitely be lower, approaching zero, for lease holders.
Buy ‘used’ for less: If you are a particularly low-mile driver, you might get a bargain at the end of the lease by buying the car at its residual value. (Sometimes, but rarely, is this cheaper than buying the car in the first place.)
Why leasing isn’t better than buying
End-of-lease risks: What happens when the lease ends? I can’t tell you, and it’s a big downside risk. “Wear and tear” damages you might have to pay can make a good lease deal a bad lease deal very quickly. And the dealer pretty much has you over a barrel, with no bargaining power, unless you are about to buy or lease another car there.
Inflexibility: Young people seem to be attracted to leases because they feel flexible – leasing seems shorter-term than buying. But leasing is often less flexible than buying, because it’s much harder to get out of a lease than sell a car (Even a car with a loan balance.) What happens if you take a job in a city where it’s unrealistic to have a car? Leaseholders can get really screwed in that situation.
Miles: Perhaps 1,000 miles per month sounds like a lot to you today, but what if your company moves to a location 35 miles away 18 months from now? Miles limits can be pretty oppressive, particularly in a world full of unknowns. The average 20-something holds 7.2 jobs before age 29; the future is hard to predict.
Overall cost: Any way you slice it, leasing is more expensive than buying, even with a loan. Here’s a simple way to look at it. Both are just methods to finance a car. With leasing, since you are paying less upfront, you are borrowing more, and for a longer time. So of course it costs more. Another way to look at it: With leasing, rather than make a down payment up front, you have the option to make a down payment three years into having the car (buying the car for its ‘residual value.’) That essentially means you are borrowing more money, for longer.
As with all generalizations, these concepts might be more or less true for you based on your unique car deal. Remember: Everything is negotiable at a dealership. The upfront costs. The monthly payment. The residual value. The ‘money factor,’ which is the leasing term for interest rate. Even the mileage (you can buy extra miles upfront, for less than you would pay after three years). So it’s possible you can lower the leasing risks through negotiation, or car-marker incentives. If so, leasing might be a good idea for you.
But my bottom line: Leasing is a bit to much like the Hotel California for my taste. Once you check in to leasing, it’s pretty hard to check out. Leasers turn cars in and get new leases, and they tend to do so at the same dealerships, for the reasons mentioned above. That means you’ll never escape the monthly car payment. And worse, perhaps you’ll get a good lease deal today, but three years from now, leases will be out of favor and you’ll be stuck.
In the end, leasing is a seductive but bad plan for saving money. But for folks who care less about money, but more about having a new car every three years, don’t drive a lot, and lose sleep over repair bill risks, leasing can make sense.
Speaking of cars, my friend recently ended up in a car accident with his newly leased vehicle. But he had to ask himself How to file a Beaufort Car Accident Claim. This meant that he had to do some searching for legal aid so he could make sure he files all of the paperwork correctly. After a long search, he was lucky enough to find a fantastic lawyer that gave him the supprt he needed and I hear his claim was successful.
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