Saturday, 26 October 2019

Leasing a Car vs Buying - Pros and Cons

Leasing a Car vs Buying

In this article we are going to be talking about buying a car vs leasing a car and which options are better for you. In this first half of this article, I go over a hypothetical scenario using numbers, that way you can see how the math actually works and how it plays out, and the second half of the article I will give you an anecdotal point of view from my personal perspective and why leasing and buying is situational for everybody's situation.


Buying Vs. Leasing

Let's pretend we are buying a subcompact car, like a Honda Civic, Toyota Corolla, it's essentially a car to get you from point A to point B.

  1. Buying A Car
  2. Leasing A Car
  3. Keep - Buy it or Buy it after your lease is up

Now, let get started


Buying A Car

  1. Purchase Price: $17,700, for this subcompact car
  2. Down payment: $2,000
  3. Interest rate: 4.22%
  4. Term: 3 Years
  5. Monthly Payment: $465


This is typical on a car loan, if you are at 800 credit score, it may be a little bit lower than this, but this is the average rate right now. 

If we are going to be buying this car, let's pretend we are selling it as well.
  • Sale Price After 3 Years: $12,000

Now, let go with the least


Leasing A Car

  1. Down payment: $2,000, because you are not actually purchasing the car.
  2. The Lease Term: 3 Years
  3. Monthly Payment: $159 - remember these are not loan payments, these are just payment that you are using to buy the car.
  4. Buyback: $12,200:  At the end of your lease term you have the option to purchase the car

Keep

If you want to keep the car, we have the buy scenario and the lease scenarios
  • Buying The Car
  1. Down Payment: $2,000
  2. Monthly Payment: $465 - Term: 3 Years, $465 X 36 months = $18,740

Now, we are going to lease the car, but we are going to buy it back at the end of 3 years.


  • Leasing The Car
  1. Down Payment: $2,000
  2. Monthly Payment: $159 X 36 months = $7,724
  3. Buy Back Price: $12,200
  4. = Total: $19,924

To buy the car outright from the beginning, cost a total of $18,740 over 3 years of ownership.

To lease the car over 3 years and buying it back at this purchase price, it's costing us $19,924.


Obviously, you can see the buying the car is more economical.

Now, let's pretend we are giving up the car, because most people in their lease, there is a higher percentage that, they actually give back the car after that 3 years period.

Buying The Car and Selling it After 3 years


  • Giving Back
  • For The Buy: $18,740
  • Selling The Car Back After 3 Years: $12,000, because we own the car after 3 years.
  • This comes out to be $6,74h0

Think of it as an internal rate of return, if we have a piece of real estate that is giving us monthly rent and we go to sell the house, not only did we realize the rent, but we also realized the sale of the house, the money that we are getting for the house.

This is similar, obviously, you are not getting paid to drive your car, but you own it for a period of time, but you actually have an asset at the end of the 3 years to be able to sell. So we are actually getting a cost of ownership is $6,740 after 3 years. 

If you want to lease the car and give it back after 3 years


  • Leasing The Car
  • Down Payment: $2,000
  • Monthly Payment: $159 X 36 months = $7,724

Even in this scenario, if you are giving back the car and you do get back $12,000 for it, you are still up ahead about $1,000.


In My Personal Opinion

It makes sense to buy a car. But let's talk about people's life situations, what if you are someone that doesn't like to keep your cars, and you are someone that needs a new car every 3 years, in my personal opinion. Leasing would probably be better for you if you are someone that is giving up cars every 3 years, but remember leasing a car will cost you a lot of work, like every weekend detailing your car, vacuuming your car, changing the oil, etc.

On the other hand, you have a car guy who knows how to buy a car and he enjoys his vehicle and he truly takes care of it, and he knows he's going to keep the vehicle for a long period of time. That is the key, so think about it.

The longer you own your car, it's going down in value, but the less you are paying for it per month. If you bought a car for $10,000 and you own it for 10 years, you can roughly estimate that it cost you about $1,000 a year to own the car.


Maintenance

The people that lease will always go back to saying hey, I don't have to worry about my maintenance, it's covered, it's in the plan, blah blah blah, some things are, some things aren't, some things fall back on you. So you are essentially repairing a rental car.

When you are leasing that is just a fancy word for renting, it's like renting an apartment versus buying a home.

At the end of the day i am all about ownership, even though mathematically sometimes it may not make sense depending on how long you own the car, however, if you care for your car and you own it for an extended period of time for many years, you will definitely be under the cost per month when it comes to a person who's actually leasing.

With leases you also have to remember that you are always limited to a certain of miles every year and for every mile that you go over, it's going to cost $0.20 to $0.25 a mile. So if you want to go take a road trip with your friends, you have to be cognizant of that. You have to watch how much you drive every week, every month, every year, so you don't go over those miles. 

When you own the car you can take out as many miles as you want.


Maintenance For The Ownership

The IRS typically has at range anywhere from $0.50 to $0.58 a mile, is what it typically costs to write off expenses on a car and believe it or not that is actually a very accurate number. Given that $0.50 to $0.58 a mile, it depends on how much your maintenance is going to be in owning this car.

If you own a high-end German car, it's obviously going to be a little bit more expenses than that, if you own a subcompact car like Honda Civic or Toyota Corolla, it may even be less.

Car leasing my opinion it's the most expensive way to drive a car because at the end of the day it's not even yours, and when you do go to buy that car, the dealerships are tacking on fee just because they need to make money somehow on that vehicle.

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