Car Lease vs. Buying What Is Cheaper?by Brandon M. Dennis
There are no hard-and-fast rules as to whether it's cheaper to buy or lease a car. It may be cheaper to lease in some situations and cheaper to buy in others. Some cars depreciate faster than others, which would make it cheaper to lease that particular model. There are other factors to consider too, such as how many miles you intend to drive.
Rate of Depreciation
If the car you're looking at has a strong potential for resale at a decent price, then you will probably want to buy it. By contrast, if the car is likely to depreciate rapidly, leasing it will be a better choice, because you won't be stuck with the loss that comes from reselling a depreciated asset. Though some cars will actually appreciate more than three times over their initial cost -- although this is rare -- most cars will depreciate immediately and never rise in value over time.
Miles Per Year
Another important part of the buy-or-lease decision-making process is how many miles per year you think you plan to drive the car. Most, if not all, lease deals have a mileage limit. Read the fine print carefully, because this may be a deal breaker for you. In most cases, you will be better off leasing a car that you know will be used heavily, because you will not need to try to resell a high-mileage vehicle -- often at a highly depreciated rate -- as you would if you owned the car. The trick is to estimate how many miles you will drive, because these savings will often be completely wiped out if the lease has a low-mileage limit.
Reasons To Lease
There are many advantages to leasing a car, such as:
Many car lease options come with servicing and other maintenance included in the monthly payment price.
It is usually much easier to switch vehicles during the lease period, and you don't need to worry about selling it and buying a new car.
The monthly payments are often lower than those of other methods.
You get a good car now, and get a better car later. If you think your income will be higher in a few years, you can upgrade to a more expensive car.
Imagine that you invest $5,000 in a used vehicle that was sold new in 2010 for $12,000. If you purchase the vehicle in 2015, the car will have already depreciated in value by $7,000 due to an average 10-percent rise in fuel efficiency in newer models and the fact that the car has already been owned by two other people in the last five years. By 2020, if you sell the car in the same condition it was in when you bought it, the car may only be worth $3,000 due to further improvements in technology that make your older vehicle obsolete. Net Loss: $2,000.
Now imagine instead of buying a used vehicle, you invest that same $5,000 down on a lease agreement on a vehicle that sold for $15,000 in 1990 and is currently valued at $17,000, but you manage to negotiate a $2,000 reduction on the sticker price. If you make a monthly payments of $200 per month over the next five years, you'll have paid $12,000 into the car, which actually exceeds the value of the car by $2,000 when you factor in the down payment. By the time you decide to buy a new car in 2020, your car will have appreciated to $19,000 due to a rise in popularity of that model. Therefore, when you trade your car in to buy a new one, you'll have the $2,000 appreciation value, the $2,000 in savings you negotiated on the first car and the $2,000 extra income that you put aside from your monthly payments, giving you $21,000 to put toward a new car. Net Gain: $6,000.
Return on Investment
If you buy a car outright, then you lose interest on that money, which could be used more effectively by investing in an asset that appreciates, rather than one that depreciates as most cars do. For example, you could invest in a house, which would most likely appreciate in value. If you purchase the car with a bank loan or dealer finance, then interest and other investments are not issues. Bankrate.com has an excellent comparison of five popular vehicle models to give you an idea of how the value of a vehicle can depreciate over time.
As with any other major purchases, the decision to lease or buy a car must be treated on a case-by-case basis. Continue to do your own research, because there are no 100-percent yes-or-no answers to be found online, and you can't always trust a dealer who is looking to increase profits.