Is it a smarter financial decision to buy or lease a car? We’ve all thought about this question and in all honesty I think the answer is pretty simple. Chime in my decision tree.
The decision to lease is really a lifestyle question. Many people want to own a new car every 2-5 years and have justified leasing because of the smaller down payments and lower monthly payments.This may be true on the surface but there are additional costs with a lease. Insurance rates may be higher when leasing a car. More so then when purchasing a new car. If the dealer decides that there is more wear and tear than normal then you can be charged for extra fees or repairs. You should also be aware of the mileage you might be driving. Typical leases will allow you to drive 12,000-15,000 miles and charge extra for each additional mile you put on. If you truly want to have a new car every so few years and can live with the constraints then yes leasing might make sense for you. To me, it’s like permanent insurance. Looks good on the outside but there are many constraints and hidden fees that makes me walk the other way.
Edmunds did a study on the cost of ownership vs. leasing of a $20,000 car. The breakeven point was about 5 years where the cost of ownership was $32,388 to buy and $32,140 to lease. The study was also stretched out for a 10 year period and it concluded that the price of owning over this time period would be about $43,000 vs. $64,000 to lease. A big gap and really not that surprising. If you lease a car forever you will have a car payment forever. Let’s say that your car payment is $200/month or $2,400 per year. After paying off the car do you think that your car will have $2,400 worth of maintenance and repair expenses each year? Most likely not but it’s important to purchase a car that has a low cost to ownership and plan to own it longer than 5 years.
Leasing might make sense but only for certain lifestyles. If you do your homework on a car that won’t break the bank to own and take good care of it than it could last 10 years. The longer you own your car the better position you’ll be in to save.