Another car lease vs. buy question

I know we’ve discussed leasing a car vs. buying before and the general consensus is it’s better to buy. But I’m looking at the numbers for a specific purchase and I need someone to convince me that that conclusion still applies here.

My son is looking to buy a car with an MSRP of about \$30K. He believes he can get either of these deals:

1. Finance it with \$3160 down, \$412/month for 60 months (APR 2.9%). Total cost after 60 months would be \$27,880.

2. Closed-end lease with \$3400 down, \$229/month for 36 months, then option to buy for an additional \$14,900. If he takes the purchase option the total cost after 36 months would be \$26,543.

Now I’ve never leased a car, and it’s been a good many years since I’ve financed a car, so there may be gotchas I’m not recognizing. But if these numbers are right it seems like the lease is a no-brainer. He pays much less per month for 3 years and then can buy the car for less total cost than the financing option. Am I overlooking something?

I think you have to consider the time value of money to make a fair comparison here. If he’s borrowing at 2.9% then make a spreadsheet where his money costs him at least 2.9% a year and see how much each option costs after the same period of time.

The lease also potentially has some complicated downsides that may or may not come up. If he drives it more than the lease expects or some other things happen, he may have to buy it at the end. And he won’t necessarily be able to finance the \$14k at 2.9%. Does he (or will he) have that much cash around to buy it in 3 years?

The question is how long does he plan to keep the car.

I keep them for 15-20 years. Even when I don’t pay cash for them, on a five-year loan you have the car free and clear for 10-15 years.

With a lease, you’re buying another one after five years. So in 15 years, you’ve spent far more than you would buying. The money I saved by not paying a lease those 10 years is more than enough to get a car.

Of course, there may be issues in getting the loan that complicate matters. But in five years, you son won’t have to be paying a lease for another car.

Unless I’m missing something, the OP’s calculations assume he’ll be paying the \$14,900 outright to buy the car after 3 years. If he doesn’t have that much cash, he’ll have to finance that, and that will add to the total cost of the lease-then-buy plan.

(On the other hand, if he does have that much cash, couldn’t he buy a car for cheaper by putting more than \$3160 down, with less to finance?)

I said that the lease plan assumes that he’ll take the \$14,900 purchase option at the end of 3 years, so there wouldn’t be another lease involved. Maybe I’m misunderstanding this comment? He does plan to keep the car for a long time, let’s say at least 10 years.

He doesn’t have much cash right now due to other recent large purchases. But he has a steady job and for the sake of this discussion let’s assume that he’ll be able to come up with the \$14,900 at the end of the 3 year lease.

In looking at car loan rates from my CU, that 2.9 looks to be a bit of a deal. However, remember that 1) used car rates are typically higher than new car rates, & 2) depending upon where the economy is in three years, the base rate may be even higher than it is now. As of now, do you interest calc on the \$14,900 based on 3.49% (< 49 months, & 3.74% > 48 months), & you have to factor that it may be even higher than that.

You didn’t calc any interest on the buyout after 3 years & given you’re talking about a 5 year loan to purchase it, I don’t think you’re going to have \$14,900 lying around after 3 years. Taking that same loan for 3 years instead of 5 saves you about \$700, which is about ½ the difference.

If he can save that much, then he is able to take a shorter loan which will drop the amount of interest he is paying. There may even be a better rate for a shorter loan, further reducing the amount of interest.
Must he maintain higher levels of insurance on a lease that what he’d get for himself? If so, those costs should factor into it as well.

You know what they say you do when you assume… If you believe this has a good chance of actually turning out to be the case, I’d still call it a “calculated risk” rather than a “no-brainer.”

Would the lease come with limitations on mileage that he might exceed?

Is the cost of insurance (or the consequences of being in an accident) any different for buying vs. leasing?

If I’m reading this right, this isn’t really buy v. lease, because your son isn’t considering this a lease. It’s “buy with a standard 5-year auto loan” v. “buy with a low payment schedule for three years followed by a balloon payment.” He’s thinking of both transactions as a kind of car purchase and the car as one that he’s in for the long haul either way.

Assuming that he’s right that those are the deals he can get, then the “lease” is the better option, if (and this is a big if) he’s got a reasonable expectation of having \$15K on hand in 3 years (if he can save the difference between the sale payment and the lease payment, he’ll have a not insignificant chunk of that) and there’s no other weird hidden fees that have yet to be disclosed.

If I’m wrong and your son is thinking that he might change his mind in a year or so or he’s not really sure where the hell he’s going to get \$15K in 2023, then that might change things. It also may change things if there are fees or additional payments that need to be made in 3 years (or if there are perks to being either an owner or a renter with that particular dealership).

I think amarinth summed it up correctly, I was thinking the same thing.

Another note: The fact that your son “intends” to buy the car after the lease period is meaningless to the dealership. He will still be 100% liable for all the lease’s attached strings. It’s still the dealership’s vehicle, not his. There is no provision to say “I plan on buying the car after, so waive all those charges for those scratches and dings and excess milage.”

Even though you’re discussing this like in both options he “owns” the car, in the lease option he doesn’t. He’s using their car for a monthly fee. One dent, one door ding or bad scratch would wipe out the difference in financing.

For the difference in price, I’d own the car myself.

Yes, you’re understanding correctly. I thought of another way of looking at the costs though – suppose we assume he’s saving a constant amount each month over the next 36 months towards the \$15K balloon. That would be about \$415/month and if we add that to the monthly lease then the lease loses its low monthly cost advantage.

My philosophy USED to be finance a car with conventional financing, at the end of the loan, at least you have something to show for it other than a smaller bank account, I’ve never seen the point to leasing for a consumer, you’re basically doing a long term rental.

bear in mind, i was financing cars in the late '80s and through the '90s, and the inexpensive cars i could afford were, well, basically crap, poor quality, poorly made, clearly loss leaders built to hit a budget and nothing more, overall American car QC back then was crap.

the biggest change to my philosophy came in '07 when i financed a used VW Mk5 Rabbit 2 door 5MT, used, but in great shape, i got 140K of reliable service out of that car, and it was fun, i could understand why people would pay more for a better car.

then another shift in philosophy, i was able to purchase a '11 Honda Element for \$11K cash sale, and the floodgates opened!, cash sale for a reliable car was the way to go, cars nowadays are good quality, so you can get a decent vehicle if you’re willing to buy a little older vehicle with life left in it, unfortunately, the Element gave it’s life protecting me from a car crash and was totaled out

so, i needed another replacement vehicle, and i WASN’T going to get back under car payments ever again, the Rabbit was the end of an era, the end of me financing a depreciating asset.

with some strategic shopping, i was able to find a certified preowned vehicle that gets 36-46 MPG, has a 2 year unlimited and 4/120 powertrain/emissions warranty, has 140HP/236 Ft-LB of torque, and is FUN to drive, and has the potential to last for 400,000+ miles, as long as New England road salt doesn’t eat away at the chassis, and all for a miserly \$9,000, under my price cap of \$11k

a 2012 VW Golf TDI, yes it’s an 8 year old car, but it still feels as solid as the day it rolled off the assembly line, and the TDIs have a well deserved reputation for reliability, for that price, i can deal with it not being brand new, as it still drives like new, and i don’t have any bloody car payments hanging over my head.

even if i had \$30K to spend on a car, i’d have bought this car, and invested the rest in something that gains monetary value.

for my purposes, cars now are so good, there’s really no reliability advantage in new cars, plus, i hate all the stupid nannyware the US government is mandating on new cars, an older, simpler car is more appealing to me.

Is that true? The lease is based upon an estimated resale value, including returning a relatively low-mileage, dent/ding/scratch free car for them to resell as higher mileage & damage lowers the resale value. However, I thought if the original leasor bought out the car they weren’t subject to those terms.

The dealer doesn’t own the car in a lease, the bank does. And if you are intending to buy it at the end of a lease, then damage doesn’t matter because the car will no longer be leased afterwards. Same with mileage overages, you wouldn’t pat for those other than the car being worth that much less relative to the residual on the lease, which is just a projected number of the car’s worth after 3 years.

OP doesn’t say what the lease terms are unless I missed it…how many years, how many miles per year, etc

This is how I thought it worked too. It would be fairly crazy if you had to pay extra fees for damaging the car and then also buy it at the fully pre-negotiated buyout price. But only the lease paperwork (and possibly state law?) could say for sure.

I threw the two scenarios into a Google doc with a modifiable discount rate so you can compare the totals correctly over time. Here’s the link to view.

Looks like it doesn’t really matter what the discount rate is, the lease is a better option (assuming that he has the \$14k to buy it and doesn’t have to finance it at a worse rate then).

You said it in many more words than I would but the point stands to my mind. For a first significant car, I would not put down \$30,000. The bigger question to the buyer is where does he want to be in 5 (or 10?) years as this car purchase now is going to thwart any home purchase plan or attempt significantly. We purchased the cheapest Toyota (Matrix) 16 years ago. We purchased it new for \$14k and have put \$1200 in tires into it, \$1000 for a new clutch, \$450 in oil and filters and head light bulbs (I do my own maintainence. We purchased an 8 year old third-hand Prius for \$3000 3 years ago. So we are right at \$21,000 + gas for two cars in 16 years. Our neighbors purchase new every 5 years with trade in. They are now on cars 8 & 9. We are good friends, similar economic standing, and quite open about discussing some things. We did a \$150,000 remodel on our house due to the money we have saved relative to their car buying habit. Note that the \$150k creates additional value on an appreciating asset!

So recognizing that I am on a soap box, I highly recommend you due the same for your off-spring. Buy used or buy cheap for something on the first go round. Take a bank loan, if necessary, to build legitimate good credit. And then look to be in a better place in a few years to go bigger then! Your off-topic comment about “other recent large purchases” suggests that the situation has already ballooned beyond his true means. Help him reign it in with some good advice!

Do both of these estimates include tax, tags, dealer fees, etc.? So they are truly comparable “out the door” amounts?

If so, under the facts that you presented, assuming: (1) that he saves the difference between the lease and purchase monthly payments, (2) that he uses these savings to pay a portion of the lease residual value at buyback, and (3) making reasonable assumptions for the after-tax interest on his savings and his cost to re-finance the car when it goes off lease, the lease will be a better deal.

One theoretical risk is that his cost to re-finance the car when it goes off lease will be so high that it would eat up the savings from his earlier smaller payments. By my rough estimate, this would only be an issue if interest rates on used cars rose to something like 22%. I’ll just say that’s unlikely unless the U.S. economy tanks unimaginably or your son destroys his credit in unfathomable ways in the next few years.

I’d look out for whether there is a balloon payment, lease termination fee, purchase option fee, or other end of lease charge that applies even if he buys out the lease. For example, if these end-of-lease charges are \$500, he only comes out ahead leasing by a few hundred dollars. If the lease end fees are \$800 or more, leasing and purchasing are basically equivalent.

Leases are complicated and through that complication, the dealer and the finance company almost always find a way to make more money on them. Good luck.

Leasing is an increasingly popular option for people who enjoy the latest technology, safety, features, etc and recognize that they typically will always have a car payment anyway. The car is always under warranty (except maybe at the tail end of a 15k per year lease), you never have to put tires, brakes, etc (on a normal car, not a high performance model), just oil changes and wiper blades. If there’s anything that goes wrong, the dealer gives you a new car loaner to drive in the interim. It’s conceptually similar in some regards to the new yearly cellphone plans where you’re paying an equipment charge to rent the phone so you get a new version every year.

I basically agree. People in general I believe tend to buy new cars more often if they lease. That’s the main valid reason IMO for personal finance guru’s to tell people not to lease if they want to save more for retirement. It’s not that leases are necessarily a worse deal on the numbers if you assume the same frequency of getting a new car. They can be a better or worse deal apples to apples v financing for a given period of time you’re going to own the car that’s the same in either case.

Here we could modify the numbers slightly to make it more apples/apples. Rather than assuming ‘the buyer comes up with \$14.9k’ after three years, assume the buyer simply finances that amount out to the end of the 5 yrs, thus owning the car outright after 5 yrs in either case. The \$14.9k becomes a \$640 monthly loan payment at 2.9% for 2 yrs, bringing the total expenditure to \$27,004 (\$3400 down, \$229/mo for 36 mo, \$640/mo for 24 mo). How about if used car finance is more expensive or rates generally higher by then? Say it’s 3.9% for the back 2 yrs, then \$646 per mo, \$27,148 total, IOW not a huge sensitivity to that. Basically it’s that much more in total payments to borrow for 1 yr average life (2yrs amortizing) v. pay it upfront at a low interest rate, but I think maybe useful to see that.

So the lease route seems slightly cheaper, plus the slight back loading makes it a little easier to carry assuming incomes generally go up over time. Again it’s not shocking if a particular lease deal is slightly better than a particular outright finance deal, that happens. If there are other fees that differ between options you’d have to factor that in, they haven’t been mentioned. In terms of insurance, if you actually did lease for 3 yrs then buy with lump sum (not 2 yr financing) you could drop collision/comprehensive coverage at that point. As long as there’s a loan/lease outstanding the lender/owner probably demands you have full coverage. Of course coll/comp isn’t purely throwing money away, there’s some expected value of insurance pay outs to you. That expected value is just generally less than your premiums or else ins co’s couldn’t cover their overhead and make a profit. So you have to consider it partly a cost to be forced to have comprehensive on a car, due to a loan, that you could survive replacing on your dime if worse came to worst.

Also the option to buy is…an option in a financial sense. If you buy outright and residual value of the car tanks after 3 yrs it’s your car anyway. If you have the option to buy at \$14.9k you could not exercise if the residual is actually \$10k, that option ends up in the money to you, to get a similar car for \$10k. That’s worth something also.

People of means will often lease high-end luxury cars (like say, a BMW 7-series) because owning one causes you to absorb breathtaking levels of depreciation relative to the price of the car.