Is Car Leasing Always A Bad Choice?

  • 3 min read

When considering whether to lease or buy a vehicle, prevalent financial advice often leans towards outright ownership. However, diving into a comparison between leasing and financing reveals intriguing aspects. For instance, let’s examine a $50,000 car—quite close to the current average price for new cars.

The Financial Breakdown: Buy vs. Lease
In this scenario, both buying and leasing are evaluated without any down payments, ensuring a fair comparison. Typically, a 5-year loan for a new car with an average 8.5% interest rate results in a $1,025.55 monthly payment, totaling $61,500 over the term.
On the other hand, a three-year lease for the same car, considering a money factor equating roughly to an 8% interest rate, yields a slightly lower monthly payment, just above $1,000. At the lease’s conclusion, there’s a residual value of $24,000. Herein lies the crucial difference: you can either walk away or opt to own the car by paying the residual value.

Exploring ownership options
Should you choose to own the car after the lease, paying the residual value extends your total expenditure to roughly $60,000, making it quite comparable to the buying scenario. Surprisingly, despite initial assumptions, the costs often align closely when you dissect the expenses side by side.

The power of flexibility
Leasing offers a distinct advantage in terms of flexibility. After three years, you have the choice to walk away without lingering payments. This contrasts sharply with financing, where, at a similar point, you’d still have two years of payments remaining. The pivotal consideration here is the vehicle’s value after the lease term—a factor that significantly impacts equity.

Evaluating Equity and Future Options
With a lease, if the car’s value exceeds the residual value, you can capitalize on the situation by buying and selling it for a profit. Conversely, if its value is less than the residual, walking away doesn’t tie you to a depreciating asset. This flexibility in dealing with equity fluctuation is a core benefit of leasing.

Digging Deeper: Uncovering Hidden Deals
Leases often contain undisclosed discounts from manufacturers and dealers. These incentives, sometimes totaling thousands of dollars, aren’t apparent at first glance. Manufacturers prefer hiding discounts in leases to maintain a car’s perceived value and desirability, avoiding the tarnishing effects associated with upfront rebates.

The Wise Consumer Approach
Whether you intend to lease, finance, or pay in cash, calculating lease payments and residual values is crucial. By adding up all costs—lease payments and the potential residual value—you gain a comprehensive view. This thorough evaluation enables you to make an informed decision based on financial prudence and the added benefit of a potential exit strategy after three years.

Empowering the Buyer
Leasing isn’t a blanket solution but rather a valuable option worthy of consideration. By comparing figures, being an informed consumer, and exercising diligence, you empower yourself to make a choice that aligns best with your financial situation and future plans. Take your time, analyze the numbers, and ensure parity in comparisons to avoid unnecessary costs or unexpected shifts in the buying process.

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