[Serviss]

I am looking for your opinion as to which is better and some specific situations where you felt, lease or buy, better suited you. Or if you are a financial advisor or accountant how do you advise on the topic. I have included my analogy below, but I am more interested in hearing other thoughts though...

LEASE - If you enjoy driving a new car every two or three years, want lower monthly payments, like having a car that has the latest safety features and is always under warranty, don't like trading and selling used cars, don't care about building ownership equity, have a stable predictable lifestyle, drive an average number of miles, properly maintain your cars, are willing to pay more over the long haul to get these benefits, and understand how leasing works, then you should lease.

BUY - If you don't mind higher monthly payments, prefer to build up trade-in or resale value (equity), like the idea of having ownership, like paying off your loan to be payment-free for a while, don't mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, expect lifestyle changes in the near future, and don't like the risk of possible lease-end charges — then you should buy.

Take care

 

[MoneyGal]

I buy used cars, paying cash. I am 41 and am on my SECOND car ever in life. My current car is now 10 years old and I have no plan to get another car. I bike to work most of the year.

I like your analogies, but felt compelled to note that buying cars doesn't necessarily mean dealing with high car payments.

 

[moneygardener]

I can certainly see both sides and I am always surprised at how many people write leasing off as a poor financial decision. I think if you are simply looking at it from a financial perspective buying a new car is exactly equal to leasing a new car.

As the OP stated there are unique personal preferances that come into play and at the end of a period where one has owned a car they can probably look back and calculate whether it would have been better to lease. Personally we own one care and lease another. Leasing made a lot of sense when we began our lease and it looks like the lease ending will be a convenient way to go down to one car.

 

[canadianbanks]

Although I have leased cars before, now I prefer to pay cash for a good value used car (3-4 years old).

 

[Canadian Finance]

I agree with MoneyGal and canadianbanks. While the numbers are close when looking at leasing over buying a new car constantly, nothing beats buying a car that's a couple years old and driving it for at least 5 years, if not 10. With a new car, whether leased or bought, you're taking too big of a hit on the depreciation.

 

[onomatopoeia]

The advantage to leasing is if you are self-employed and can deduct part of the payment for business use.

Personally, we have 1 car now which was purchased used.

My wife and I are debating a second car right now. We'll probably get a new car as she puts lots of mileage on a year (35-40k) and the deals out there are pretty good right now for cash purchases - and lots of 0% financing as well.

The problem with buying a used car and driving it for "5-10" years is that if you put a lot of mileage on it you can't drive them that long. I bought my current car assuming I would but 10k a year on it, then my wife came around and now its 4x that.

 

[brad]

The problem with buying a used car and driving it for "5-10" years is that if you put a lot of mileage on it you can't drive them that long. I bought my current car assuming I would but 10k a year on it, then my wife came around and now its 4x that.

When I lived in New England, 40,000 km is about how much I put on my car every year; I drove it for 402,000 kilometers over 10 years and then sold it to a family who drove it another 160,000 kilometers before selling it on to someone else. That was a Honda Civic, but you could probably do the same with any good-quality Japanese car these days, and even some of the European and American models last a lot longer than they used to.

 

[MGL]

I agree with MoneyGal and canadianbanks. While the numbers are close when looking at leasing over buying a new car constantly, nothing beats buying a car that's a couple years old and driving it for at least 5 years, if not 10. With a new car, whether leased or bought, you're taking too big of a hit on the depreciation.

If you're looking for a new car, I tend to think that a good lease can be an excellent option- I wrote a piece in defence of car leasing last summer.

However, I'm not much of a fan of buying a car that's just a couple of years old- at that point, you're still going to see double digit year-over-year depreciation, but you lose the benefit of a full warranty, choice over features, and full control over how the car is treated from day one. In some ways, it's the worst of both worlds.

If you're really looking to keep car costs and depreciation to a minimum, buy an older used car (at least 8-10 years old) and run it until it runs no more, rinse and repeat. Even with expected maintenance and repairs, you'll come out ahead.

 

[MoneyGal]

Yes to MGL with one proviso: because my husband is fully self-employed (and I have some self-employment income as well), double-digit depreciation on a 5 year old car (the age of the last car we bought) is OK with us, because those depreciation costs are partially offset by a tax deduction.

We primarily use our car for business purposes -- most of our personal activities take place by foot, transit or bike -- so the bulk of our car expenses are deductible.

 

[investnoob]

I thought this Q and A by Dave Ramsey was enlightening:

http://www.daveramsey.com/etc/askdave/index.cfm?event=dspAskDave&intContentItemId=10367

 

[specialk]

I thought this Q and A by Dave Ramsey was enlightening:

http://www.daveramsey.com/etc/askdave/index.cfm?event=dspAskDave&intContentItemId=10367

Dave is the King!

 

[MGL]

I thought this Q and A by Dave Ramsey was enlightening:

http://www.daveramsey.com/etc/askdave/index.cfm?event=dspAskDave&intContentItemId=10367

It's an interesting Q&A, but it doesn't present any compelling arguments against leasing. Let's look at what Ramsey says:

A car fleece is basically renting a car. You pay $400 a month and at the end of the new car lease, you turn it back in. If you want to buy it, you are buying it for what they estimate at the beginning of the fleece to be the market value. At the end of the lease, it’s called the residual value. If you pay $400 a month for 60 months, you pay $24,000 before turning it in.

This is correct. It should also be noted that, assuming you've properly negotiated the lease, (total payments) + (residual) = (negotiated price) + (finance / interest charges).

The car will not have gone down in value more than that, because the car companies would lose money if it did. When they get the car back, you will have paid them more than the car has depreciated during that time.

And a car company could never lose money, could it? In some cases this will be true, in others it won't. A few years back, it was common to see lease promos with inflated residuals as loss leaders. It's also market dependent- if you leased a large SUV in 2005, your residual at lease end in 2008 was likely significantly higher than the actual value. In other words, you paid less than the actual depreciation cost over that period.

Ramsey seems to be under the impression that all lease residuals are extremely pessimistic. Some are, some aren't. The reality is that predicting the future value of a car requires is far from an accurate science and depends on any number of external factors. You can take a look at the residual and determine, based on market trends, whether it looks reasonable or not.

During that time, you’re maintaining the car as if you owned it. You’ll get charged for excessive wear and tear, or if you put too many miles on it. If you rent it for $24,000 and it went down $15,000 in value, then it cost me $9,000 to rent this car for this period of time. That is their profit during that time.

If your total payments over the lease period are $9,000 more than the actual depreciation, your residual should also be $9,000 lower than the market value at lease end. If that's the case, you'd be a fool to walk away- buy out the lease and sell it privately. That $9,000 is now back in your pocket.

In this way, a lease gives you much more certainty than a purchase- you know from day 1 what the walk away price is at a set point in the future. If your option to buy is notably less than the market value, buy the car. If it's notably more, turn it in- you've come out ahead.

With respect to mileage, this is something that you negotiate and agree upon upfront. No surprises should be found here. With wear and tear, it is no different than if you own the car- if you don't take care of your car, it will be worth less than if you had taken care. You'll incur a loss either way, the only difference is that with leasing you've actually got to cut a cheque.

Another thing is that the interest rates on a vehicle lease are not disclosed because the Federal Trade Commission has determined that this is not a debt, so there is no federal disclosure involved. Therefore, you have no truth in lending disclosure sheet. The interest rates you get charged are unbelievably high. That’s where you’ll realize you got screwed over.

This might apply in the US (I have no idea if it's accurate), but it doesn't in Canada. Anyone with a calculator and basic math skills can figure out the true cost of leasing to see if you're actually being screwed over and what your actual cost of borrowing is. The problem here is not with leasing, it's with people not properly negotiating their lease.

People get sold automobile leases because they are told that it’s what sophisticated people do. But as it turns out, the car companies make more money on leasing you the car than if you bought the car with cash, according to the National Auto Dealers Association. Broke people think ‘how much down and how much a month’. Rich people think ‘how much’. If you can’t pay cash for a car, then ride a bicycle. But don’t lease a car.

It's not always a question of whether you can pay cash for a car, but whether you actually want to. Not everybody wants to tie up cash in a car.

Leasing is not always the best option, but it's far from the abomination that folks like Dave Ramsey like to make it out to be. Crunch the numbers and make an informed decision on whether it works for you.

 

[brad]

One other option to consider if you're not a frequent car user is a car-sharing program. In the States, Zipcar is ubiquitous; here in Montreal we have Communauto and I imagine other cities in Canada have their own car-sharing services.

When you crunch those numbers you start to wonder why anyone would ever buy or lease a car, although car-sharing doesn't work for everyone. You pay an up-front membership fee and a modest annual subscription, and then you pay per use. When you consider that there are no maintenance costs, insurance is wrapped into your per-use costs (so if you drive infrequently you pay a whole lot less insurance than if you have your own car and pay an insurance premium every year), and the cost of interest on a loan if you don't buy your car with cash, car-sharing wins hands down.

Car-sharing would work almost perfectly for someone like me who needs to use a car maybe four or five times a month. It takes me a month or more to go through a tank of gas. But I can't bring myself to do it because I like the convenience of being able to just hop in my car whenever I want to and not have to worry about bringing it back by a certain time. I'm paying very heavily for that convenience, though. My car's paid for (I bought it with cash) but my expenses for insurance, fuel, maintenance, and repairs ran $3,400 last year and will only increase as my car grows older.

 

[investnoob]

Nice post MGL. I agree with all your points.

While I don't have a car, I do know that if I do ever get one it will probably be a used civic or corolla paid for in cash. Its just a personal preference to stay debt free. I easily fall into the financing trap of "oh, well I can afford the payments!"

One thing that always troubled me is that my friends never put anywhere near the amount of thought you described in your post. Instead they ask themselves "is the monthly payment manageable?" And that is usually the extent of it.

 

[MoneyGal]

Another way to think about the lease vs. buy question is like a call option, with the residual price for the vehicle at the end of the lease as the strike price.

So, if you think about the right embedded in the car lease (the right, not obligation, to purchase the vehicle at the end of the lease) like a call option with a strike price, how you conduct yourself in lease negotiations will depend entirely on whether you want to own the car at the end of the lease.

That is: if you have no interest in ever owning the car, push the strike price as high as you possibly can -- this will lower your monthly payments.

Then, if you compare costs to own versus costs to buy over a specified period (say, 36 months), you can compare the two costs on a side-by-side basis. You can work this out on your own given the initial price of the car, monthly costs to buy and monthly costs to lease for an identical period of months, and different buyback (or "strike") prices.

Make sense? I don't know that the general public ever thinks about derivative markets but this is, I think, a good example of the basic concept of a call option.

 

[Jon Chevreau]

Till recently, we owned two 10-year old vehicles and neither was new when we acquired them. Still own them but also just bought a new Prius. I've never leased nor been tempted to. Yes, massive repairs occassionally arise for the Volvo (which I joke is Swedish for "money pit") but then there are months on end with no payments at all. Somewhat of a gamble either way.

 

[Rickson9]

My wife and I work for companies give us $1000 per month (each) to purchase a car (in addition they pay for gas, car washes, oil changes, etc.) Since the car is basically 'free' we just need to decide if we want to lease or finance.

Some of our colleagues lease the cars b/c they can write off the entire lease amount in their taxes (and get a new car every 3-4 years). We financed it b/c we want the company to buy us a car at the end of 'x' years.

For example, my car has been entirely paid for by the company so I have no finance payments left, but I still recieve the $1000 per month taxable benefit for a car.

 

[refutor]

<My wife and I work for companies give us $1000 per month (each) to purchase a car (in addition they pay for gas, car washes, oil changes, etc.) >

that's a good gig if you can get it

 

[specialk]

Ramsey seems to be under the impression that all lease residuals are extremely pessimistic. Some are, some aren't. The reality is that predicting the future value of a car requires is far from an accurate science and depends on any number of external factors. You can take a look at the residual and determine, based on market trends, whether it looks reasonable or not.

Precisely why you shouldn't do it at all.........unless you have a crystal ball.


It's not always a question of whether you can pay cash for a car, but whether you actually want to. Not everybody wants to tie up cash in a car.

Exactly why you should not tie up cash in a 15,000 + vehicle, when a 5-10000 used cash car that has already lost most of it's value (very predictable because it has already happened) If you are rich, I say go for it either way.

Leasing is not always the best option, but it's far from the abomination that folks like Dave Ramsey like to make it out to be. Crunch the numbers and make an informed decision on whether it works for you.[/QUOTE]

Anything that ties up your monthly cashflow that you could be saving/investing, and leaves you with a risk of not being able to make payments should something happen in your life...is an abomination.

 

[RLMT]

i signed up just to reply to this thread ... so i look forward to everyones comments and feedback. maybe i am out to lunch?

i prefer leasing and think in most cases its a far better use of your money.

let me use an example excersize that i went through last year as i had to replace my used car. i landed up with an 2007 Jetta and that will be car in this case study and use the #'s that were provided to me, so this is realistic.

3 people choose the same care, Mary, John and Paul.

1. Mary pays cash - $23,500
2. John finances - $550.00 / month x 48
3. Paul leases - $300 / month x 48 + 15,000 residual

Case 1 - Mary
Mary uses her cash and immediatly turns 23,500 in 20,000 an by the time 4 years rolls around she has an asset that is worth about 15,000 and has now warrenty and continues to decline in worth. not too mention if she doesnt fix the repairs that are coming, her asset becomes worth even less. she also lost out on about $4000 in opportunity cost of not investing that money in that period.

I see no reason to tie up your own cash in a depreciating asset. terrible use of money.

Case 2 - John
John has spent $26,400 for an asset worth $15,000 and all the other issues in case 1 apply. no warrenty and a depreciating and deterioating asset.

Case 3 - Paul
Paul spent about $14,400 for the same car. granted he doesnt have the asset worth $15,000 (and going down) but if he was smart he has invested the $250.00 per month that he saved by leasing vs financing and now has a nest egg worth $12,000 and growing. as well, he has earned another $4000 or so in interest by keeping his cash invested.

Conclusion?
Why wouldnt you want to be the person who doesnt have their cash tied up in metal and rubber? Paul has full access to all his $$, saves $12,000 and does not own a depreciating and deteriorating assett.

and frankly if he loves the car, he can buy it if he so chooses. but unlike Mary and JOhn, what if the car is an absolute lemon (that happens even to HOnda), they dont have that option. sure they can sell it privatly, but thats not like taking pop bottles back for a deposit, it is certainly not a turn key solution.

I once learned a rule:
own things which appreciate, rent those that depreciate.

am i out to lunch? those are real #'s, not just made up. they match excatly the choices i had to make.