Should You Buy or Lease a Car?

Before you roll the windows down, put your foot on the gas pedal and drive off the lot, you need to decide: buy or lease? It might not be an interesting decision like choosing the right horsepower or paint color for your vehicle, but it’s an important one nonetheless.

Diehard mainstays of the “buy” camp often take pride in driving their cars into the ground before moving to the next one. People on the other extreme are staunch proponents of leasing who usually love getting the latest tech in their new car every few years. But your particular circumstances and preferences, plus a little math, are likely somewhere in the middle.

The basics of leasing

Leasing allows you to borrow a car for an agreed-upon number of years while making lease payments to the lender. The average lease term in the last quarter of 2020 was just over three years. The amount that you pay in monthly lease payments is a product of the depreciation that will occur during the lease term, as well as interest and fees. Everyone has heard the adage that a new car loses a good portion of its value once it’s driven off the dealer’s lot. That number generally equals about 20%–30% of the car’s value in the first year of the car’s life. As the lessee instead of the owner, you won’t see this decline on your balance sheet, but the car lender still factors this into how they structure lease payments.

Car dealerships will usually charge a down payment to enter into a lease agreement. This down payment goes toward reducing leasing costs, which in turn reduces your monthly payments. On a per-month basis, lease payments tend be less than purchasing the equivalent vehicle, but the downside is that you’ve got nothing to show at the end of the lease term. The upside is that you have the flexibility to enter a new lease or purchase a vehicle without worrying about trade-in value or depreciation on the vehicle.

Pros of leasing

• Lease payments tend be less per month than purchasing the equivalent vehicle
• Potentially lower down payment than when purchasing
• Access to the latest technology package and safety features
• The vehicle is covered by the manufacturer’s warranty
• You may potentially pay less in sales tax, since sales tax is only calculated on the lease payments as opposed to the full sale price when purchasing
• Business owners can deduct leasing expenses for tax purposes

Cons of leasing

• Lack of ownership
• No equity in the vehicle to put toward your next car
• Limited number of miles (usually between 12,000 and 15,000 miles per year) that can be driven before incurring fees, which can range from 10 cents to 50 cents for every additional mile
• GAP insurance (guaranteed asset protection) is required, to cover the “gap” between the vehicle’s value and the loan balance
• Potential limitations on where you can get your vehicle repaired
• Bad credit can make it difficult to obtain a lease
• The vehicle must be returned in good condition, or excessive wear-and-tear charges may apply
• It can be costly to end a lease early

The basics of buying

The purchase of a new or used vehicle can be done with cash, the trade-in of another vehicle, financing through a lender or some combination of the three. When financing a vehicle, the lender will continue to hold the title for the vehicle until the loan has been paid off. The size of the loan is first determined by the agreed-upon purchase price and then reduced by a vehicle trade-in or down payment. You have the flexibility to determine how long you’d like to pay down the loan. This length of time, along with your credit score, factor into the interest rate that the lender will charge on the loan. The average loan rate for vehicle purchases in 2020 was 4.3%, while the average length of a loan for a new vehicle was 70 months (65 months for a used vehicle). The shorter the loan, the less interest you’ll pay over the life of the loan. The longer the loan term, the lower your monthly payments will be, but you’ll end up paying more in interest costs over the life of the loan. However, once the loan is paid off, no more payments need to be made on the car, and your savings, when compared to ongoing lease payments, really start to hit the gas.

Pros of buying

• You own the vehicle
• There are no further payments once the loan is paid off
• You are free to sell the car whenever you want
• There are no mileage restrictions
• You can customize the vehicle
• Whether you like keeping the car clean or throwing wrappers in the back, the car’s condition is your personal preference

Cons of buying

• Monthly payments tend to be higher than when leasing the equivalent vehicle
• A higher down payment may be required to avoid being “upside down” on the loan (when you owe more on your vehicle than it’s worth)
• You are responsible for all repair costs once the warranty has expired
• You will potentially pay more in sales tax than leasing a vehicle

What’s right for you?

Leasing is likely appropriate if you’d prefer a new car every few years, you drive less than 15,000 miles per year and you would benefit from lower monthly payments. Buying a car might be right if you plan to keep the car for at least four or five years, you don’t mind if the technology and condition of the vehicle age, and you tend to drive more than 15,000 miles per year.

In terms of the life cycle costs of a vehicle, it’s important to understand the frequency and cost of maintenance. Does the vehicle require specialized maintenance and imported parts? Or, can maintenance and parts be sourced at your local repair shop? It often makes sense to lease higher-end vehicles since the maintenance can be more expensive and the vehicles tend to depreciate faster. Vehicles with high reliability ratings are often better purchases because they will continue to drive well long after the loan has been paid off.

Ultimately, the decision comes down to your circumstances, preferences and financial goals. As always, it's a good idea to consult with a Corient Wealth Advisor before proceeding with any significant financial decision.

Sources

• https://www.creditkarma.com/auto/i/how-car-depreciation-affects-value
• https://cars.usnews.com/cars-trucks/buying-vs-leasing
• https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/credit-trends/2020-quarterly-trends/v2-2020-q4-state-automotive-market.pdf
  

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