Almost one in three new cars on the road in America is leased. This trend is on the rise, inching up from just 22% of new vehicles in 2012 according to cars.com. Does leasing a car make more financial sense than owning? The answer is almost always – no.
Here’s the Short Story:
If you want to drive a new car every three years, leasing a car is probably for you.
If you want to get the best bang for your buck, you are not using the vehicle for business, and you’re willing to hold onto a car longer than three years, buying a car is likely the better choice.
- Car leases are a luxury.
- You will pay for that luxury.
Here’s the Longer Story:
Leasing a Car is Better for Managing the Payments on a New Car
When you’re leasing a car, you’re basically paying for the depreciation of the vehicle plus fees and interest. You’re not paying into the equity or ownership of the vehicle. Therefore, it makes sense that a leased vehicle’s monthly payment is less. According to Experian Automotive, the average monthly lease payment is around $100 lower than the average new vehicle loan payment.
Cars Depreciate the Most in the First Three Years
You’ve heard it said before, “a car loses half its value when you drive it off the lot.” This is actually not true. Driving the car off the lot only decreases its value by 11%. However, after three years, a car loses on average 46% of its value, even though its utility might not be lost in the same proportion. In other words, the car is not technically 46% less useful than it was when it was brand new, it’s just valued as such. This is why purchasing a used car that is three years old, or older, is the best bet for saving money in the long term.
How You Drive Could be a Problem
The dealership, who leases you the vehicle, has a formula they use to determine how they’re going to make money on the lease. Depreciation and residual value are the two biggest factors in determining how much the dealership will be able to sell the vehicle for when the lease is up, and you return the vehicle. The age of the vehicle isn’t the only thing that comes into play- mileage, dings, dents, and other wear and tear also come into the picture.
How Much You Drive Could be a Problem
You can’t just take a leased vehicle, drive it across the country a few times, and expect the dealership to absorb the additional stress and wear you put on the tires and engine. They must account for the affect those miles have on the vehicle’s value. During the lease, the mileage maximum is often around 12,000 miles per year. That means, over a 3-year lease, the maximum number of miles you can drive is 36,000. If you exceed that number, the leasing company will charge you for every extra mile driven. The per-mile penalty is spelled out in your lease, but it can run as high as $0.25 per mile. That would mean that every time you make your 20-mile round trip commute, it costs you an extra $5 on top of gas. If you drive fewer than the maximum number of miles allowed, you’re under-utilizing the miles the dealership assumed you’d drive, and are already charging you for. There are no refunds for unused miles.
Dings and Dents- You’ll Probably Pay for Them All
The cost of the normal wear and tear you put on a leased vehicle may surprise you. With a car you purchase, you can ignore dings and dents, because you paid for the vehicle. You own it. No one is penalizing you for scratching your own car. The dings and dents will only affect you financially if you try to sell it, trade it in, or if it is totaled. Figuring out how much they will actually cost you is easier said than done. The dealership often has a lot of discretion on what to charge you when you return the car.
More Expensive in the Long Run
While leasing a vehicle can help you minimize your monthly payments on a new vehicle, it doesn’t make sense in the long run. If you’re willing to drive a vehicle that’s a few years old, purchasing a used car makes more financial sense than leasing a brand new car.