GMR 82: Which is Better, Leasing or Buying a Car?
Episode 82
With the average price of cars continuing to rise, leasing has become more popular in recent years, especially for luxury brands. But, is leasing really a less expensive way to drive? In this episode of Getting Money Right, you'll learn everything there is to know about leasing to help you decide which is best for you, leasing or buying.
SHOW NOTES
The average price of a brand new car this year is just shy of $35,000.
Cars have increase in cost due to:
Cars today have more expensive safety equipment and features than ever before.
Increasingly rigid government regulations also contribute. Government mandated emissions controls and fuel economy requirements drive costs up.
Actual dealer profit margin, as a percentage of sticker price, on new cars has gone down in recent years. Used to range from 7%-8%, with some vehicles up to 15%, but today the margins are down, with some being as low as 3%. In order to increase margins, many dealers will dramatically market leases because they have more fees and costs built in to increase the profit margin.
According to LeaseGuide.com, around 75% of all luxury cars are leased. The reason is because banks don’t like to loan out more than $30,000 for a car loan. If you want a car that’s worth more than that and you don’t have the money to make up the difference, leasing is your only option.
As automotive consumers attempt to deal with higher vehicle costs, they are opting for longer and longer loan terms — up to 84 months (7 long years). This means higher interest costs and, in most cases, being “upside down” on the loan for years.
Costs:
Gap insurance (what you owe vs what it’s worth).
The Cap Cost, or Cost of Capitalization: refers to the amount that is being financed with a lease.
Money Factor: This is simply the interest rate on a lease but expressed as a decimal number. Dealers sometimes mark up the money factor for additional profit. If you feel you are being overcharged, ask the dealer for a lease based on their "buy rate."
Residual Value: This is the agreed-upon value of the car at the end of its lease term, after accounting for the car's anticipated depreciation. Banks or leasing companies typically set this amount based on industry data. The best cars to lease are those that tend to retain their value over time -- e.g. at least 50% of their original value after 36 months.
Acquisition Fee: Sometimes called a bank fee or administrative fee, this is a fee that leasing companies charge to arrange the lease. This fee is typically between $395 - $895, depending on the vehicle and leasing company. Note that acquisition fees can be bundled into the monthly lease payment, or paid up-front.
Buy-Out Price: If you think you may want to purchase your leased car at the end of the lease period, check to see whether the leasing company is flexible on the buy-out price. In some cases, they may agree to set the buy-out price lower than the residual amount.
Disposition Fee: This fee is charged by the leasing company to cover the expense of cleaning up and selling the car after you return it at lease end. Most charge between $300 and $400. You normally won’t be able to avoid this charge unless you buy the car at the end of the lease -- or, in some cases, lease another car of the same brand.
Sales tax: In some states, sales tax is charged up-front, and is usually added to the lease capitalized cost (unless paid in cash). However, in most states sales tax is simply paid as part of each monthly payment.
Early termination penalty fees.
Over mileage fees (10,000 | 12,000 |15,000).
Higher insurance cost over buying a used car, because you’re insuring a more expensive vehicle.
You can’t sell your car whenever you want. If you lose your job and can’t make payments, you’re stuck in the contract. Same might be true if you buy a brand new car. But if you buy a used car, then you can usually sell it for the same price you purchased it.
Normal Registration, License, Tag, and Title Fees.
Lessees often end up in a cycle of getting a new car every few years, the period during which cars lose their value the fastest. That typically leaves them paying much more than if they bought a new car with a loan and kept it for four years or longer.
Why leasing seems appealing on the front end:
Although leasing doesn’t change the price and one-time costs you pay for a new car, it does offer significantly lower monthly payments since you only pay for the part of the car’s value that you use — its expected depreciation in value — instead of its entire value. At the end of the lease, you return the car or purchase it for the remaining part of its value that you haven’t already paid.
Leasing can therefore make a new car much more affordable in terms of monthly cost, although leasing a new vehicle ever 3 years or so is obviously more expensive in the long run than buying one car and driving it for years. When you lease, you’re constantly paying for the most expensive part of the vehicle.
One thing you should never do is roll over your old car loan into a new car loan or into a lease.
Pros of Leasing
You drive the car during its most trouble-free years.
Cars have more electronics and are harder to troubleshoot requiring you to take it to an expert.
Cars are better designed today than ever before and there’s more diagnostic equipment available to the general public and a greater knowledge base (youtube) to help you with repairs when/if maintenance is required.
You're always driving a late-model vehicle, and one that's usually covered by the manufacturer's warranty, which may include free oil changes and other scheduled maintenance.
You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford.
You don't have to worry about fluctuations in the car's trade-in value or go through the hassle of selling it when it's time to move on.
There could be significant tax advantages for business owners.
At the end you just drop off the car at the dealer.
Cons of leasing
Mileage limit - 5 to 20 cents per mile if you go over.
More miles allowed during the lease will cost you more up front
Normal wear and tear is covered but not if the wear is above normal
With a lease you’re stuck with the payment. You can always sell and walk away from a purchased car.
Buying a car means the payments will one day end, not with leasing
When the lease is over you have no car and no equity to use to purchase the next car.
Which is cheaper?
Example:
We found a promotion for a 2019 Honda Accord Sedan 2019 lease deal listed by Edmunds.com (you can find similar deals here). After $1,000 down, the lease payments are just $401 a month for a 36-month, 45,000 mile lease. The total cost for three years comes to $15,436. Let’s assume you found a similar lease again for another three years. Your total cost comes to $30,872, or $5,145 a year for six years.
The same vehicle had a target price of $27,637. If you put the same $1,000 down and financed the car for 60 months at 3 percent, your monthly payment would come to $516. At the end of the 5-year loan, the total cost to purchase the car (including interest) comes to $30,980. Over six years, your annual cost would come to $5,163 a year.
Leasing is cheaper by $115 per month, but you have one extra year to pay compared to buying. And, after the loan is paid off, you own your car. You have an asset. According to Kelly Blue Book, a 2013 Honda Accord LX in mid-grade condition fetches about $13,000 on the private market. So whether you sell the car or apply the trade-in value toward your next purchase, your actual cost of ownership is reduced to $17,980 or $2,996 a year. That’s a savings of 2,149 a year and $12,894 over six years.
Buying in the long run is cheaper than leasing!
Resources
Budgeting and Debt Elimination Tools
Jesus on Money by David Thompson - stewardshippastors.com