I want to know what would be better. To buy a car or to lease one.
Buying is always best. The only time you’d ever want to consider leasing is if you have enough money and you like having a new car every 2-3 years (and don’t want the hassle of buying/selling). Here’s a great site on the subject. A few highlights:
/Slightly Off Topic/
In London, I rent a car when I need to go somewhere I can’t get to on a train or coach.
It’s MUCH cheaper than the cost of the car+petrol+road tax+MOT+insurance+congestion charge+parking space rental and won’t get stolen and burned like the 20 or so cars that got torched in our street in the last 2 years.
You can read at: carbuyingtips.com too
The other situation where leasing might be an option is if you don’t have the money to buy and you don’t think you can get a loan. Granted, this is pretty rare since if you can’t get a loan, there’s not much chance of being approved for a lease either, but still - this is the logic that a friend of mine used to lease his current car. I’m still not sure I buy it though (no pun intended) 
The way I see it, financially, the best bet is a “lightly used” late model car i.e. something around 2 years old w/ 20-30K miles on it. It’s common knowledge that the most expensive mile you drive is the first one on a new car. As soon as you drive a new car off the lot, the value depreciates by approximately 1/3. By purchasing a used car, you allow someone else to incur that initial depreciation, plus you can generally get more car for your money.
One example:
New Baseline VW Golf with few or no extras or…
2 year-old used fully loaded Toyota Camry
Very nearly the same price!
YMMV
I would avoid leasing but only if you dont want to buy the car in the first place. I financed my new car, but the next car I’m considering is a small econo toyota echo. Nothing I want to own. Leasing an echo is something like $179 a month from Toyota Credit. Finance is about $250-300. I figure since I don’t want to end up owning the damn thing it’s better to lease my second vehicle.
I guess it depends on your circumstances. If you don’t have the money to finance, lease (but be wary of the “extra” charges). If you get attached to your vehicles finance. If you want to gamble with a little money lease it (then buy the vehicle if the buy back is lower than the market value of said vehicle).
My friend is financing his $42000 WRX. For $2000 down (Canadian) he’s paying $650-ish a month for 4 years. Buy back is $18000. Do the math, he’s paying something like $10000 more to lease than to finance if he wants to buy the car (and he has to, he’s already modified it).
When you buy a car, you must pay in cash or by financing the total price of the new car.
That’s an easy concept to understand.
When you lease, you must pay in cash or financing the difference between the price of the new car and the wholesale price of the car at the end of the lease.
In other words, in a lease, you pay for the difference in value between when you got the car and whenyou give it back.
However - it’s not that easy. Everyone knows that you shouldn’t pay “full boat” list price when you buy a new car. You always negotiate down from the sticker price.
But when you lease, they often figure the cost of the new car as the full sticker price – or even more – with no discussion. So you’re paying for a “difference” in price that’s largely illusory.
In addition, the lease agreement limits you to a certain number of miles - typically 12,000 miles per year. In other words, the “fair wear and tear” on your car is assumed to be 12,000 miles per year; you pay a penalty for miles in excess of that figure.
That are relatively few circumstances in which leasing makes financial sense.
I’ve leased two cars in my life. They both made perfect financial sense at the time. I purchased my present car because it made perfect sense at the time. I’m not going to rule against leasing in the future if it makes sense.
If you look out for yourself, you can theoretically get the exact same price on a lease vs. buy. As said above, don’t lease based on the sticker. Everything’s negotiable.
The nice thing about a lease is you’re not stuck with the car after two or three or even more years (don’t lease more than 3 though). If your time is valuable to you, you may not want the hassle of selling your car when it’s paid off.
Sit down with Excel and do all of the math – you’ll find that you can get the exact same deal with buying vs. leasing.
(by “same deal” I don’t mean same payments, but same cost of ownership).
God, I hate this discussion so much. It’s funny that there’s also a thread going on right now about whether to buy a house or lease an apartment.
The short answer is that there is not an answer to your question; it is not always “better” to buy a car or lease a car. It all depends on what you will do with the car when you own it, how long you want to own it, how much risk and what kind of risk you want to take, etc. etc. There’s no one answer that’s correct for everyone.
Also, there’s a third way: many dealers have something (often called a performance loan, or premier purchase, or something) that is essentially a balloon loan (i.e., you make payments for three years then owe a big sum of money at the end).
There’s no substitute for spending some quality time with a calculator and your personal balance sheet and then doing some soul searching.
Oh, the reason I hate this discussion is that people come marching in with big notions that don’t have much sound theoretical backing, like: “Don’t ever lease a car OMG RUN!!” or “If you just lease an apartment for every you are throwing money away, blah!”
Some people’s fanaticism on these issues borders on the religious.
Leasing a car CAN make a lot of sense, and I say that as someone who’d never do it!
Personally, I don’t much care about luxury, and have never looked at a car as an investment. My philosophy has always been, “Get a well-built car, and drive it into the ground.” If that means keeping a Toyota for 9 or 10 years, that’s fine by me. I’m pretty well immune to the charms (and scents) of a brand new car, and am happy with a comfortable, functional vehicle.
But that’s just me- I don’t expect everyone to be happy with what I gladly settle for. It may be that you want or need a brand new car every few years. And if that’s important to you, and you’re prepared to treat a car payment as a monthly expense (like rent) that you’ll be paying for the rest of your life, leasing MAY give you lower payments than buying.
Personally, I own a house, and am happy with it- but I’ve rented several homes in the past, and never felt I was “throwing away” my money. Quite the contrary! I got something of value for my money: a pleasant place to live.
Bottom line: there isn’t any right or wrong answer here. It all comes down to what kind of car you want or need, how important it is to you to have a new and/or luxurious car, and how much those things are worth to you. Once you decide what you want/need, THEN you can decide whether buying or leasing is a more economical way of getting what you want.
I wrote this analysis of purchase vs leasing a few years ago for a Canadian discussion forum. I throw it in here for review, though it was specifically written for the Alberta jurisdiction, and some of the assumptions may well not apply here.
I’ve had to make certain assumptions to make this generally applicable.
Price of car: $30,000
Residual value in 3 year: $15,000
Other assumptions will be pointed out where necessary.
To calculate a lease payment, you must understand that it is made up of three components: Depreciation Fee (DF), Finance Fee(FF), and Tax. Thus, payment = DF + FF + Tax
DF = (cost - residual) / term
FF = (cost + residual) / money factor (MF)
While FF looks odd, since you are adding cost and residual, it is a commonly used formula to circumvent the onerous constant-yield annuity formulas. Essentially, you are calculating the average amount financed. The MF is an easily derived formula that is the interest rate divided by 2400. I shan’t get into that. Trust me.
I’m going to assume a prevailing rate of 8%.
DF = (30000-15000)/36 = 416.67
FF = (30000+15000)/(.08/2400) = 150.00
Your pre-tax payment is $566.67. In Canada, tax on car leases are applied only on the monthly payment (as opposed to some states where you pay tax on the entire car price, even though you are not buying the “entire car”).
Lease Payment = 566.67*1.07 = 606.34
Purchase payments are a different formula. The formula is:
Payment = (P(r/12))/(1-((1+(r/12))^-m))
where P=principal, r=interest rate, m=number of payments. For those who need a refresher, “^-m” is “to the power of negative m”.
In order to be conservative, I note that purchase interest rates are sometimes lower than lease interest rates. While you can get special deals through the manufacturer for no payments for a period of time, very low interest financing and such, I’ve ignored them and we’re going with common interest rates. I assume that while you pay 8% for lease financing, you can get purchase financing for 6%.
You also have to note that tax is applied on the entire amount at purchase.
Thus, your purchase price is higher (price x 1.07)
(32100(.06/12))/(1-((1+(.06/12))^-36)) = 160.5/.164355 = $976.54
Next, we must calculate the value of the difference between the payments.
Obviously, by leasing you are paying (976.54-606.34)= $370.20 less per month.
I’ll assume that instead of spending this money on giant chrome exhaust pipe ends, neon under-car lighting and other crap, you put that money into an investment vehicle. I’m going to assume that you can get 6%. Long term equity trends show 10% to be a good number over the long run, but we want to be conservative. There’s also no guarantee that those 3 years fall into an “average” return period. There’s no question that there’s some risk here, but we have to make some assumption for our purposes, so I went with 6%.
We are calculating the Future Value of an Annuity.
FVOA = PMT[(((1+(i))^n)-1)/(i)]
where PMT is the payment amount per period, i is the interest rate for the period and n is the number of periods. In order to derive ‘i’, we need to divide it by 12 (since we have an annual rate but not a monthly rate).
FVOA = 370.20[(((1+(.06/12))^36)-1)/(.06/12)]
FVOA = 370.20[39.336] = $14,562.23
“AHA!” say the purchasing proponents. “Since you can sell your purchased car for $15,000, you lose almost $500 on the deal!” Yes and no. We’ve made some assumption that are conservative in nature. In our particular example, it came in a bit pricier to lease. However, note that the price that you sell your car for will likely not be $15,000. The actual sale value of a car can differ from the book value. Even if you had to knock off only $500 from the price, you’re still coming out less.
Further, it seems to me that $500 is a small price to pay to have the flexibility to have available that extra $370 every month should you need it for some reason. Further, we have ignored the tax benefits of leasing that will apply to some people. Further, we have ignored that most provinces have more than just GST to apply to the price of the car.
Further, if the interest rate spread is less or you can get a better return on your invested money, the lease rate will end up cheaper in addition to all of the above. Further…you get the idea.
Standup Karmic, thanks for that post. The sad part is that many of the folks who think leasing is from the devil and wouldn’t ever ever ever do it!! RUN! won’t be able to understand it. (Not that I’m saying anyone here has that attitude).
Some of the “logic” is this thread is absurd. Leasing is for people who don’t care where there money goes. This is almost certainly not people who can’t afford to even finance a new car. For them, the answer is a slightly used car. Know your financial limits and live within them.
In particular, you don’t buy a car for $30k that’s going to be worth $15k in 3 years. (Therefore you can avoid reading the rest of SK’s lengthy post!)
God, I can’t believe the amount of ignorance that keeps getting spewed forth in this thread! This thread is a blight upon the Straight Dope and should be expunged!
lowgear, dealers also talk you into buying the car in the first place (whether you lease, finance, or pay cash), so according to your logic no one should ever buy a car, and we should just all take the bus I guess.
What about if you lease the car through a small business?
ftg, can I safely assume that you read the title of the thread as, “Buying a Car or Leasing for those who can’t afford a new car”? I’m sure you are quite aware that the value of new cars drop drastically upon their leaving the lot. With that said, there are plenty of people who choose to have one. This thread has nothing to do with people living beyond their means, so your comments are really no less than a blatant hijack.
lowgear, your comments are completely lacking in any actual substance. If you believe that every salesman who wants you to do anything is a direct indication of what you should not do, in your own best interest, you may well want to go live on a commune, as you’ll never buy a single thing.
sultana of slash, leasing with a business perspective in mind can have definite benefits, but you will want to talk to your accountant to determine just what those benefits will be. IANAA, but can say with some assurance that you will enjoy certain tax and cash flow benefits from leasing over purchasing.
If you want a new car every 3-5 years, can stay within the mileage and “wear and tear” limitations, negotiate the best possible price of the vehicle and can get favorable finance terms, leasing can make sense for an individual.
It probably doesn’t make a lot of sense to lease for a term longer than the vehicle’s standard warranty.
The least expensive way to go, generally, is to purchase a three year old used car with a proven track record of reliability and economy of ownership. In most cases, for a three year old vehicle nearly half or more of the depreciation, the highest cost of vehicle ownership, has been absorbed, yet a high-quality three year old vehicle should have many years of useful life remaining. It’s still usually best if the car has at least a bit of the factory warranty remaining. Have this vehicle checked by a trusted mechanic if you cannot reliably judge the quality of a used vehicle by “the seat of your pants.” Negotiate the best possible purchase price and the best loan terms.
One takes a risk in purchasing a used vehicle, but the premium for buying new is pretty steep for many folks of modest means.