Buying vs. Leasing a Car

When one is contemplating the purchase of a new car, there are two basic options: outright purchase (with or without financing) and leasing. Leasing can be subdivided into lease/purchase and lease/buyback agreements. A lease gives the buyer more flexibility, but that flexibility comes at a significant cost, as well as restrictions on the vehicle’s use that are not imposed on one who buys a vehicle outright. It is best to carefully consider both options in terms of what future use the vehicle will receive.

A lease essentially amounts to buying the first two or three years of the life of a new car. At the end of that period, the lessor typically surrenders the vehicle back to the seller. The lessor is expected to have maintained the vehicle in accordance with factory specifications. The car also should not be damaged beyond normal wear and tear. Furthermore, there is usually a mileage restriction—typically 12,000-15,000/year. If any of these factors are exceeded, the lessor will have to pay extra, sometimes quite a bit more than anticipated.

In the first few years of a car’s life, it loses half or more of its value via depreciation. Conversely, after a car is five years old or more, it depreciates very slowly. Therefore, to lease a car, then lease another one, etc. is to be constantly suffering the maximum depreciation loss, over and over. While lease payments are generally lower than car payments, the lessor never reaches the point that the owner does, when the car payments are all made and the vehicle is owned free and clear. At that point, operating costs fall off sharply. As Edmunds (2009) puts it, “In a nutshell, leasing makes it easier to get more car for less money. You are essentially paying for a portion of the car, instead of buying the entire vehicle. So, like many things, leasing looks great in the short run. But if you take the long view of economics, you will see that leasing will eventually be more expensive” (Edmunds, n.p.). In strictly economic terms, leasing is a bad idea.

However, there are benefits from leasing that may be, for some people, worth the long-term economic loss. When you drive a leased vehicle, it is almost always under a factory warranty. This reduces operating costs. With a vehicle purchased outright, at some point, the factory warranty will expire; sometime after that, the car’s maintenance needs will increase. Also, for people in some professions, driving a new or nearly new vehicle is necessary to make the proper impression. Driving a ten-year-old car may connote frugality, but driving a new car sends the message that the owner is well off. For professionals such as doctors, lawyers, realtors, etc., the image may be very important. In addition, as DMV.org notes, “If you own a business and use the vehicle only for business purposes, you can claim it as a tax deduction” (DMV, n.p.). This is why leasing is an attractive option for business owners: the new vehicle confers more prestige, operating costs are lower, and some or all of the vehicle’s use (lease payments, etc.) may be tax-deductible.

While the benefits of leasing are conferred in the short run, the benefits of buying are conferred in the long run. Even though maintenance costs may be higher for an older car, the buyer doesn’t have to make any more payments, and depreciation is close to zero. Conversely, the lessor is always making payments, and the amount he pays reflects the fact that he is continually using up the most valuable years of the car’s life—the initial ones. Many people like to lease because they want to be constantly upgrading to the newest, most sophisticated models. This is a valid rationale, but one never “catches up,” in that one is always leasing the newest and the shiniest. Also, there comes a point for many people when they simply like the car they’ve been driving and want to keep it. This would only be possible under an open-ended lease; with a closed-ended lease, lessor ownership is terminated when the lease has expired, period.

The difference, then, is that outright ownership is best when you’re “in it for the long haul” and are looking at your car as a long-term investment. Conversely, if your needs and goals are more in the short term, then leasing might be best. One factor that many people overlook is somewhat counterintuitive: what if I simply don’t like this car? You might think that the buyer would be in worse shape in this situation, but actually, the lessor is. After all, the buyer can simply sell or trade-in his car for a different one. The lessor is generally stuck with the car for the duration of the lease, or else must pay a heavy price to terminate it. As Martin (2012) remarks, “Lease contracts are purposely written to discourage and even prevent early termination. To do so usually means you'll pay a termination penalty. The earlier you terminate a lease, the higher the penalty” (Martin, n.p.). So the dissatisfied lessor not only is stuck with the leased vehicle, but he also has to continue paying for it until the lease contract is up. This could also be a problem if the vehicle is a “lemon” (which could mean that the make and model overall have maintenance issues or that this one vehicle has problems). While a leased lemon would be under warranty, it is still inconvenient to have one’s vehicle constantly in the shop; after all, that pretty much obviates the whole idea of getting a new car in the first place.

The bottom line is that leasing is much different from owning. This does make the decision fairly clear-cut for most people. It is likely that for a given buyer in a given situation, one or the other of the two alternatives will be far superior to the other. Since either buying or leasing a car is a significant expenditure, the potential car purchaser should familiarize himself with all the ramifications of both leasing and buying and of course, read all contracts carefully.

Works Cited

DMV.org. (2013). Leasing vs. Buying. Retrieved from http://www.dmv.org/buy-sell/new-cars/leasing-vs-buying.php

Edmunds. (2009). Should You Lease or Buy a Car? Retrieved from http://www.edmunds.com/car-buying/should-you-lease-or-buy-your-car.html

Martin, Ray. (2012). The Pros and Cons of Leasing a Car. CBS News Moneywatch. Retrieved from http://www.cbsnews.com/news/the-pros-and-cons-of-leasing-a-car/