The single most often-cited reason for leasing a car instead of buying is that you won’t own the vehicle you’re driving, therefore, it doesn’t make sense to lease. This is often stated as a self-evident truth, with no further analysis being required. Unfortunately, many people take such statements at face value, without really considering all of the implications.
There are some assets that are almost always desirable to own, if you can afford to do so. A home is one of those things. Even with all of the risks and responsibilities of ownership, owning your own home almost always beats renting, because homes nearly always appreciate in value. This makes them a great investment, allowing many people to accumulate real wealth through their ownership.
But cars are a very different proposition. The average car will lose 11 percent of its value, the second it drives off the lot. Most cars will lose half of their resale value within the first three years of rolling off the assembly line. With assets like that, who needs liabilities?
It turns out that the risks of owning a depreciating asset are just one of the many reasons that makes owning your own car, arguably, less attractive than leasing one.
Here are some other things to consider when deciding if buying a new car is really the route that is best for you or if leasing could give you the same capabilities at lower cost and less risk.
Leasing, on average, will give you a sharply reduced monthly payment
For some people, not owning their own car may be considered a cost of leasing. But certainly one of the greatest benefits of leasing is the money that is saves you, every month you have your car. For any given car, leasing will give you sharply reduced monthly payments over what you would be forced to pay by purchasing with a bank loan. And the worse your credit is, the truer that statement becomes.
For example, someone with a middling credit rating and perhaps some bad notes on their credit history may have payments on a $35,000 car of between $700 and $800. Over the course of a five-year loan, much of this money will end up going straight to interest, which may easily run as high as 10 percent per year, depending on the terms of the loan.
However, that same car will often be able to be leased for as low as $400 per month. Over the course of a 36-month lease, this can add up to tremendous savings, as much as $10,000 or more. It can also allow those who simply could not afford a new car under any circumstances to get a less expensive model for payments of just a couple hundred dollars per month. In fact, this is one of the most powerful aspects of leasing. It can allow access to a new car for those that simply wouldn’t be able to otherwise acquire one.
Leasing dramatically reduces up-front costs
A related but distinct issue is the sometimes huge up-front costs that people who buy cars on bank loans are required to pay before driving off the lot. Down payments of between 20 and 30 percent are not uncommon. And with fees and taxes, this can easily total over $10,000. Most people just don’t have that kind of money laying around to be used for bulk-payment cash outlays.
Leasing, on the other hand, often allows the customer to drive off in a new car for just a couple hundred dollars. Typically, leases only require prepayment of the first month’s rent and a small security deposit. The total savings between the up-front costs and the money saved on monthly payments can be truly staggering. And a lot of the reason such savings are possible is because the buyer is leveraging the dealership’s ability to maximize the value they can create in the cars they sell. In a sense, they can give great deals on the cars they lease because they will be able to get a great price when they resell that vehicle. This is a subtle but important point. Many people lament how much more cars tend to cost at respected dealerships. But this ignores the fact that, often times, the value they create is worth even more than the premium they charge. Which brings us to the last reason to lease, instead of buying. You don’t have to worry about playing amateur car dealer.
With a lease, you get to walk away when it’s done
Car dealerships are multi-million-dollar businesses. They often with tends or hundreds of highly trained employees and enjoy huge economies of scale and exclusive deals on parts that no private seller could ever achieve. Dealerships have such a huge edge in the used car market that trying to compete with them as an amateur is, more often than not, a fool’s errand.