Leasing or Buying a Car: Which Costs More?

Auto Loans, Loans
leasing-buying-costs

If you consider only upfront costs and monthly payments, leasing a new car seems like a slam dunk. But when you look at the big picture — car ownership over the years — you realize leasing’s true cost.

There are two main reasons leasing is more expensive over the long haul:

  1. You always have a car payment, although it’s typically lower than a purchase payment. Someone who buys a car and pays off the loan can enjoy years of payment-free driving.
  2. As you pay off a car loan, you’re building equity, which is value you can use. With leasing, you make three years of payments and then return the car to the dealer.

Two financial scenarios: leasing and buying

It might still be hard to believe that leasing is more expensive than buying. After all, some monthly lease payments are much lower than monthly purchase payments for the same car.

To prove the point, let’s look at two different consumers over a six-year span: one who decides to lease an average, mid-size sedan for $24,500 and one who decides to buy the same car. We’ve rounded the numbers off.

Leasing

This consumer would make $300 per month in lease payments and pay two $1,000 drive-off fees, a combination of costs such as a security deposit and an acquisition fee. Because most people lease for three years, six years equals two leasing cycles.

Six-year out-of-pocket leasing costs: $23,600 ($300 x 72 months + $2,000 drive off fees)

Buying

This consumer makes a down payment of $4,000 and takes out a five-year loan at 3% for the rest. He or she has a monthly payment of $380 for five years and one year of making no payments at all.

Six-year out-of-pocket buying costs: $26,800 ($380 x 60 months + $4,000 down payment)

At this point, leasing is looking really good. It beats buying’s out-of-pocket costs by $3,200.

But the person who bought the car now owns a 6-year-old vehicle worth about $9,500. He or she can sell the car or continue to drive it without making a car payment. And if the car buyer sold the vehicle and added this money back into the formula, the results would look very different. Buying would become $6,300 less expensive than leasing over the six-year time period.

In a strictly financial sense, leasing is more expensive. But that’s only the dollars-and-cents side of the story.

Leasing’s appeal

Advocates of leasing are probably protesting, saying, “Yeah, but you’re comparing a 6-year-old car to the brand new model I just leased.” This is true, and it’s one of the reasons that leasing is more expensive.

There are several other intangibles that leasing supporters like to tout:

  • If you use your car for business, it can be a valuable tax deduction.
  • It allows you to drive cars with the latest styling and technology.
  • Low monthly payments let you maximize cash flow.
  • By only keeping each car for three years, you’ll always be under the carmaker’s bumper-to-bumper warranty.

Advantages of ownership

On the flip side, once you pay off your car loan, you have a measure of freedom unavailable to the lessee. For example, if you lease a luxury car and lose your job, you must still make the remaining payments. But if you own, you can ride out the economic storm, albeit in an older car. Or you could sell the vehicle and get some of your money back.

Even if economic hardship strikes when your car loan isn’t paid off, you might still have equity in the vehicle. This means you could trade it in for a less expensive car, or sell it, be done with car payments, and pocket the equity.

Adding it up

So which is better, leasing or buying? That question generates lively debates, a little like Red Sox vs. Yankees or liberal vs. conservative. It’s clear that leasing is more expensive in the long run, but there are other advantages that offset the extra costs. You can use an auto loan calculator and a lease calculator to compare monthly payments, but remember, that’s not the only thing that matters.

Ultimately, your final decision will be a blend of your personal taste, your lifestyle and your budget.

Philip Reed is a staff writer at NerdWallet, a personal finance website. Email: preed@nerdwallet.com.