Car: Purchase or Lease?

In a recent New York Times Article (Auto Leasing Gains Popularity Among American Consumers) the author, Aaron Kessler, reported that not only are cars sales up generally, but that the number automobiles acquired through leases as opposed to purchase has risen sharply:

1-27-2015 1-28-06 PMThe rate of leasing in the United States was higher last year than at any time in more than a decade, according to data provided by Edmunds.com and Kelley Blue Book.
More than one out of every four new vehicles were rented, rather than bought, by American consumers — and the percentage choosing a lease has risen sharply over just the last two years. It is now roughly 27 percent, up from 22 percent in 2012, according to Edmunds.

So clearly a larger portion of the buying public believe that leasing an automobile is the better option for them.

What About You?

Would car leasing , rather than purchase, be a good strategy for you? Like so many questions in life, the answer is, “It all depends.” But there are several considerations that can help you decide whether it may be an option worth pursuing. Continue reading for our thoughts on these factors.

How much do you drive?

Generally car leases are written for about 3 years with a yearly mileage figure of 12,000 to 15,000 miles. If you exceed the total mileage amount there will be an additional cost-per-mile at the end of the lease. If you only drive, say 5000 miles a year, you will still be paying a monthly fee as if you were driving the 12/15 thousand miles. If your yearly mileage is in the sweet spot of 12,000 to 15,000, then leasing might appeal to you.

What will be the residual value of the car you’re looking at in three years?

This is important because when you lease, you are paying for the depreciation of the vehicle during the time of your lease. The more the car depreciates, the more you will pay. To use two extreme examples, suppose you were interested in two different cars, A and B. The purchase cost of A is $40,000  and at the end of three years, it’s anticipated that it will worth $20,000. Your monthly lease payment would have cover the depreciation cost of $20,000. Car B, on the other hand, has a purchase cost of $60,000 with an anticipated residual value of $50,000. With B, your monthly lease payments would only have cover a cost of $10,000.

Assuming interest rates and other fees are about the same in both cases, with B you could drive a car worth 50% more than A, for about half the cost. The key point is the anticipated resale value. That, of course, is a number that the financing company determines, not you! But if you’re thinking about a car that generally holds its value well, then leasing might look good.

What’s more important, monthly cost or total cost?

We won’t go into all the arithmetic here, but generally when you lease you will pay less per month, but more over the long haul. This is because when you lease your payment finances only the depreciation during the period of your lease. When you purchase the car, you are buying the whole car, so your monthly payments are more (assuming the same loan term as the lease term). But at the end of, say three years, the lessee has no equity value and the purchaser has the value of the vehicle at that point.

How often do you get a new car?

Most automobiles, and certainly any vehicle that a leasing company would consider financing, have useful lives of many years. It’s not hard to keep and drive a car for five, six and more years. On the other hand, leases are generally written for about a period of three years. If you keep your vehicle for many years you will likely have passed the point of warranty coverage, or at least much of it, so the risk of repair bills and the inconvenience of them increases with time. So how long you plan to keep your car is really a personal choice. If you’re inclined to get something new every three years, you probably already are leasing your automobiles.

Changing landscape

The New York Times article, quoted above, brought up another interesting perspective. There is a convergence of consumers who have grown up in a world of personal technology and the automotive industry putting more and more technology into their products. The shelve life of technology is short. The brand new “gotta-have-it” feature today is “so-three-years-old”, three years from now. Smart phones and other gadgets are replaced, not because they’re broken, but because the rapidly changing technology has left them behind.

And so it may be with the automobile. Most of us with a driver’s license can drive a car and park it. Yet, there are developments coming which will have the car itself perform those tasks. Well maybe not everybody will crowd the showrooms looking to buy a self-parking car, but the siren call of technology will be heard. As Arron Kessler put it in his NYT article:

The automobile is evolving from just a machine to take people where they need to go, to a “smartphone on wheels” that is as much about the tech experience as the driving itself.

Is car leasing for you?

This article did not delve into the many aspects and details of leasing an automobile. There is plenty of content on the internet that can help you if you’re interested, but hopefully this article hit the major considerations of whether leasing could be something to investigate:

  • How much do you drive?
  • How well does the car you have your heart set on hold its value?
  • What’s more important, monthly outlay or the total cost over the life of the car?
  • How long would you like to have the car?
  • Does staying current with technology appeal to you?

Think through these questions and you’ll have a good idea of whether leasing might be a good option.

As we said, “It all depends.”

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