Automobile Buy vs. Lease

The debate between purchasing a new car versus leasing one has long been a rather heated yet fascinating one. The newest twist to this debate is the constantly improving technology which has caused the buy vs. lease debate to take on a whole new dimension.  The author has always been in the “buy” camp, and believes a car should be purchased coming off a lease to help reduce the impact of the rapid depreciation experienced by brand new cars. Once purchased, drive it until the wheels fall off. The longer a person can go without a car payment the better. However, that mindset might need some adjusting.

The typical reasons people buy a car are, they like the thought of eventually not having a car payment, they can afford a decent down payment to reduce the monthly loan payment, they really like the make and model and don’t mind having it for a long time. The rule of thumb is that buying makes sense if the average annual mileage is less than 7,500 or greater than 15,000, don’t mind a higher monthly payment and they don’t need the latest and greatest model. Research completed by JD Power lists the top reasons to buy a car as, anticipated reliability, styling, previous brand experience, reputation and reviews, ride and handling, and price.

The typical reasons folks lease are, the need for a lower monthly payment, desire for new car every few years, average annual mileage of 7,500 to 15,000, the belief that a depreciating asset should be rented not purchased, and  not wanting to worry about maintenance.

As we age, the constantly improving automobile technology such as lane departure warning, stop assist, and rear view cameras provide unprecedented safety. These safety features and the speed at which technology improves make the buy/lease debate even more interesting. In my opinion the advantage goes to leasing especially for older folks where the advanced safety features could literally be lifesaving.

Other fundamental differences between buying and leasing includes, ownership; upfront costs; monthly payments; costs associated with early termination, vehicle return, mileage, excessive wear & tear, and customization.

Another factor in this debate is the long-term cost. If we were to compare the costs of financing a car with a six-year loan vs. two back-to-back three-year leases, based on leasing an identical car twice. Comparing theses costs of the exact same car is important to ensure that it is an apples to apples comparison! The $2,000 cash due at signing is paid at the start of each three-year lease. This hypothetical example is based on a $29,429 2017 Mazda CX-5 Touring with an automatic transmission. The figures have been rounded to whole numbers.

  6-Year Loan 3-Year Lease(s)
Monthly Payment $416 $287
Down Payment $2000 $0
Cash Due at signing $0 $2000
Interest Rate 2.9% 0.024%
Total paid after 3 years $16976 $12332
Residual Value after 3 years $0 $16994
Total Paid after 6 years $31952 $24664

Since this is a long-term comparison let’s assume the purchased car has a life span of 9 years, so  there needs to be another 3 year lease added. That means another $12,332 making the total cost to lease $36,996. Since, the purchased car had a 6-year loan there are no addition costs, keeping the total at $31,952. Even if the costs for maintenance and repairs were added to the purchase cost I don’t believe it would make up the difference of $5,044.

In this side by side comparison of an identical car, the purchased car has a slight financial advantage of just over $5,000. However, 2.9% financing is extremely low. It is anticipated that interest rates will be rising in the not too distant future which would greatly impact that financial advantage. Another cost that would greatly affect the financial advantage is the purchase of an extended warranty. Additionally, the constant advancements in technology, especially the safety features, give a substantial edge to leasing. As we age, these safety features carry more and more weight in this debate. For younger folks the advantage would also go to leasing because of lower monthly payments and the fact that all maintenance costs are included in the lease.

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