Lease vs. Buy: How to Choose What's Best For You

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Senior Pricing Analyst

As CarsDirect’s resident pricing analyst, Alex offers must-know analysis of pricing & incentives to those looking to buy or lease a car. His consumer-oriented coverage of the latest trends and breaking news has been featured in publications such as Car and Driver, Motor Trend, Automobile Magazine and Autoblog.

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, Senior Pricing Analyst - August 28, 2017

The decision to lease vs. buy isn't easy, but it could have a profound effect on your finances. If a car will lose half its value in 3 years, it's no surprise that many shoppers are opting to lease rather than buy thanks to low monthly payments and the promise of better affordability.

On the flipside, those against it often cite that leasing back to back will result in a perpetual car payment and higher overall costs compared to simply owning and maintaining a car free and clear over a long period of time.

So what's the case for buying vs. leasing? What are some of the costs associated with each? What are some examples that make one a smarter choice than the other? And what are some other factors that you should consider?

Here's what you need to know.

Updated August 28, 2017

Case For Buying

One of the nicest parts of buying is the prospect of owning your car free and clear without having to ever make another payment once your loan is paid off. In contrast, someone who always leases will perpetually be making car payments.

Another reason, albeit old fashioned, is pride of ownership. When you lease, you never really own your car. When you buy, you don't necessarily have to worry about incurring excess wear & tear charges from things like minor fender benders.

If you're looking to do a ton of driving, buying also has the benefit of not limiting you to a mileage cap. You could lease a car thinking 12,000 miles a year is enough, but you'll incur overage charges if you underestimate your usage or if your commute stretches as the result of a move.

In terms of discounts, some cars are a smarter bet when buying. For example, the Ford Fiesta features a $3,000 rebate for buying but only $1,500 for leasing. Earlier this month, GM introduced a deal on the Chevrolet Impala worth 20% off MSRP (as much as $6,915 off MSRP), whereas the national lease discount was only $1,500.

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Case For Leasing

When you consider most cars will lose roughly half their value over 3 years, leasing can certainly seem like a smart choice. After all, if a car is a terrible investment from a financial standpoint, why bother with sinking a ton of money into a purchase?

Sure, you'll potentially be making car payments indefinitely if you only lease, but a lot of shoppers already consider this on par with paying rent or a monthly cell phone bill. If you find it difficult to fathom why someone would want to own the same car for 10 years, leasing may hold some appeal.

In essence, you're paying for the privilege of being able to drive a car or truck with the latest features without worrying about being stuck with a depreciating asset. If you were to do the same thing by buying and selling over and over, you'd almost certainly incur large losses as a result of depreciation.

If you run into maintenance issues, leasing practically ensures you'll always be covered under warranty. In contrast, buying means you're on your own after the warranty expires. Given how costly parts and labor can be (and not just for luxury brands), leasing can seem pretty appealing.

Some cars can also be smarter to lease rather than buy. For example, the Nissan Maxima currently features a $1,000 rebate for buying but $3,925 in discounts for leasing. In a more extreme case, the Kia Optima Plug-In Hybrid features a $2,500 rebate for buying but a whopping $8,919 in factory savings for leasing.

Top lease deals this month»

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Cost Of Buying

Interest costs for financing a new car can vary quite a bit. For a baseline, buying a $20,000 car at 3% APR will probably cost you about $1,562 in interest over 60 months (5 years). Rates generally go up incrementally depending on the length of your loan.

For a 72 month term (6 years), a rate of 4.5% would run about $2,858 in interest, or 14% of the vehicle cost. If you have excellent credit (like a FICO score over 720), some automakers offer 0% for up to 72 months. For example, the Ford C-Max Hybrid features $3,000 cash on top of 0% APR for 60 months.

However, there are some big trade-offs to consider. Some brands make you choose between taking a rebate and low-interest financing. For example, the Toyota Camry currently offers a choice between a $3,000 rebate and 0% for 72 months plus a $500 bonus.

In some cases, it may be smarter to take the rebate instead of low interest financing. In that case, you can still finance, but it will likely be at the market rate or a discounted rate through your dealer. Let's say you bought a Camry at $22,000.

At 0% for 72 months, that would come out to a monthly payment of about $305. But if you were to take the $3,000 rebate and finance at 3% over the same term, your payment would be $288. In this case, the rebate would give you a lower overall cost. That said, your decision should be based on your unique circumstances.

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Cost Of Leasing

When you opt to lease, you're essentially paying for the car's initial depreciation, interest cost and fees. This is based on residual values that represent what the car is expected to be worth at the end of the lease. Vehicles with higher residuals generally offer better leases, but manufacturers may also subsidize leases through hefty discounts.

Like other forms of financing, there's a cost associated with interest referred to as money factor. However, unlike the rate on a loan, it's represented as a decimal. For example, the money factor on an Acura ILX is currently 0.00056, which equates to an interest rate of about 1.3%. With discounts, the ILX is one of the cheapest leases on a luxury car.

If you go over the mileage allowance stated in your lease, you'll incur overages. For example, this month's lease on the Honda Civic factors 12,000 miles per year with an overage cost of 15 cents/mile. If you anticipate going over, you can often have extra miles factored into your lease, sometimes at a discount compared to paying later.

Similarly, if you're rough on your car or get involved in a fender bender, you may incur excess wear & tear charges. However, the costs associated with this may vary quite a bit dealer to dealer. Some may even be more lenient if you'll be leasing another vehicle, but there's no guarantee.

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Cost Comparison

Although offers vary depending on make and model, it can be helpful to compare different options. Here are some examples for illustrative purposes.

Example 1: Nissan Sentra

Here in Los Angeles, the Sentra SV can currently be leased from $149 for 36 months with $1,999 due at signing and 12,000 miles per year. Its effective monthly cost equates to $205, making it one of the cheapest leases on any new car this month.

On the other hand, if you were to take a $2,000 rebate and finance at 3% APR for 60 months, you'd likely end up with a payment of around $302/month assuming no money down and a modest dealer discount.

You'd likely need to come up with a sizable down payment in order to get your loan payment to a more reasonable number. In this case, opting to lease could seem like a smart bet.

Learn more about the Sentra »

Example 2: Toyota Highlander

Since it's a popular model, the Highlander features very few incentives. There's no rebate and no special financing offer, at least in Los Angeles. Assuming a modest dealer discount and zero down, a Highlander LE would run roughly $549/month at 3% for 60 months.

However, the vehicle's favorable residual value of 62% makes it a pretty good deal when leasing. This month, it's listed at $339 for 36 months with $1,999 due at signing. Its effective lease cost comes in at $395 and is based on a money factor of 0.00072, which equates to an interest rate of about 1.7%.

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Things To Consider

Safety: Over the past several years, there has been a surge in the amount of safety technology available to shoppers. Manufacturers have also been revamping how they build cars in order to meet stricter safety standards like the IIHS Side Overlap crash test.

At the same time, even entry-level cars are gaining advanced features like automatic emergency braking, lane departure warning, adaptive cruise control and more. In this sense, upgrading sooner rather than later could bring many benefits.

Technology: As a whole, cars have become more fuel efficient than ever before. For example, the redesigned 2017 Honda CR-V is rated at 34 mpg highway, which is actually higher than a Honda Civic from nearly 20 years ago.

Turbocharging has become common, in addition to developments such as stronger and lighter construction and features like auto stop-start, connectivity options to reduce distracted driving and more. Some brands are even shifting to electrification, which could result in more plug-in hybrids over the next 4-5 years.

Lifestages: It may be difficult, but consider where you'll be in 3-4 years. If you anticipate a growing family, it may be smarter to lease for now to avoid putting yourself in a position where you'll lose a ton of value by buying and selling when you need to upgrade.

Alternatively, if you don't know where you'll be, that could make a good case for leasing. Some brands even offer special rates for 24 month rates that have nearly the same monthly cost as a 36 month contract. For example, the Kia Optima currently features the exact same deal for both.

Taxes: This is probably the last thing shoppers think about. States actually have varying rules for how sales tax is treated when buying and leasing. Here in California, it's based on the monthly payment when you lease. However, when you buy it's based on the total vehicle price.

Conclusion

There are clearly many factors to consider when choosing whether to lease or buy. Understanding the strengths and weaknesses of each can put you in a good position to make a smart decision when the time comes. There's no one-size-fits-all approach, so consider working with your local dealer to identify some options you feel comfortable with.

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, Senior Pricing Analyst

As CarsDirect’s resident pricing analyst, Alex offers must-know analysis of pricing & incentives to those looking to buy or lease a car. His consumer-oriented coverage of the latest trends and breaking news has been featured in publications such as Car and Driver, Motor Trend, Automobile Magazine and Autoblog.

Follow On: Twitter

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