I posted some thoughts about this in a past thread, I still think they are relevant.
[QUOTE=Throatwarbler Mangrove]
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Stuff like “not having a car payment is nice”, “at the end of the lease, you don’t own anything” and the such are financially meaningless drivel used to hoodwink the uneducated into silly decisions. Car salesmen in particular seem to throw it at me all the time.
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The basics are thus: A car, just like any other capital asset, has a certain depreciation curve - this will be a little different for each car, but they are generally shaped such that there is a steep drop off in the value of the asset in the first few years, followed by a shallower curve that works its way to zero.
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The further forward on this curve you go, the more difficult it is to figure out where you actually are on the curve - things like maintainence and the general condition of the car, together with changing external conditions (e.g. gas prices, sequels in the The Fast and the Furious franchise that feature certain models, etc. ) start having unpredictable effects. In fact, when dealing with new cars, I would say the ability of yourself or even the dealer selling the car to predict what the future depreciation curve will look like even for the first few years is somewhat limited. What if the first-year-model car you buy turns out to be the next Ford Pinto - a model from a reputable make that was generally well regarded until the problems started to surface?
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Whether you buy or lease a car, you are essentially taking ownership of an asset and paying for a portion of the depreciation curve. If you buy a car and drive it until the value has depreciated to zero, then you would have “paid” the full price of the car. When you lease the car, you are essentially agreeing to pay for the portion of a pre-determined depreciation curve covered by the terms of the lease.
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There is another corresponding curve - the amount of benefit you receive from ownership of the asset. Obviously the car is not going to generate any cash, so you have to reckon this as a measure of how much you enjoy having the car.
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I’ve always assumed that this curve is inverse (Wrong. I meant directly related) to the first curve - that is, your greatest level of enjoyment is when you drive the car off the showroom floor, this gradually drops off as the car is used up. Two years down the road, the car will still be adequate, but the girls won’t be as impressed by your 2 year old car as they would be by a brand new one. This seems reasonable to me, and would be supported by my observation that 5 year old cars are generally cheaper than 3 year old cars. Of course this applies to the common cars that most people buy, not to your 1965 Chevelle SS.
I draw a number of conclusions from the above. First, if your goal is to maximize the area under the “enjoyment” curve while minimizing the area under the “depreciation” curve, (OK, they are not really geometric values, but you get my drift) there is no straightforward answer to whether you should finance or lease - you need to gather all the relevant information from the offer to lease and the offer to sell, and see where they fit on your personal “chart”. With this in mind, one can obviously see that comparing leasing for 2 years to the cost of owning a car for 10 years is silly - the appropriate comparison would be to compare leasing for 2 years versus buy a car, and then selling it 2 years down the road and buying a new one.
Second, the idea of “buying a new car and driving it until it dies” makes no economic sense if you have an “enjoyment curve” similar to a normal persons - that is, a normal person generally moves up in life as he gets older, and wants to have nicer things. The aforementioned “drive it until it dies” person is apparently willing to pay the largest portion of the depreciation curve up front, in exchange for the largest portion of the “enjoyment curve”, but afterwards, loses all interest and at year ten, is willing to settle for a 10 year old beater as long as he doesn’t lose any more to depreciation. If this describes your preferences, then all the more power to you, but it’s a rather odd outlook on life.
A more reasonable course of action would be to start out with older used cars when young and poor, paying the minimum amount of depreciation, and when you are older and richer, leasing more expensive cars - you’ll pay for the higher depreciation, but compared to buying a new car and selling it every two years, leasing is generally more attractive. Again, get all the facts and figures first.
I’ve read up a bit on this depreciation thing and it is quite complex, often leading to unexpected results. For example, for the last few years, the lease terms on a BMW 3 series have always been quite favourable - to the point that it would be cheaper to lease a 3 series than, say, a Toyota Camry of similar value, since BMW gives you a marginally higher buy-out cost at the end (or, if you prefer, a flatter depreciation curve). I think the reason for this is that a 2 year old BMW 3 series is a very sought after car by young men anxious to piss their money away, and that the folks at BMW figure that they can unload these things pretty easily at the end of the lease, even compared to other BMW models like the bigger 5 and 7 series, which are not particularly popular used cars.
A large portion of the depreciation curve seemingly has little to do with the merits of the actual car, and everything to do with inventory management on the part of the manufacturer. Most small Volkswagens for example, seem to retain their value quite well, while most small American cars are worthless the minute they leave the lot. Strange, considering that VWs of the past few years are generally regarded as being dreadfully unreliable cars. Most of this seems to be related to the fact that VW simply has more flexible inventory management than GM/Chrysler/Ford. VW imports as many cars as they need, and no more. Everyone who wants a new VW gets a new VW, and everyone who wants a used one will have to wait until the new owners get bored. Compare this to the unfortunate situation at the Detroit 3 - bound by inflexible union labour contracts and manufacturing facilities, they are forced to churn out endless numbers of cars that flood dealers lots, and eventually rental company lots and fleets, to the point that 1 or 2 year old model values are seriously depressed by the flood of NEW models (and 1 or 2 year old off-lease fleet units) being pushed on to the market. All this despite the original car being an otherwise pretty good piece of machinery.
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To this, I would add that leasing can be thought of as having a “put” option on the car that expires at the end of the lease - if something unforseen happens and the mark-to-market value of the car is lower than the residual value of the lease, one is protected from that downside, while if the car holds it’s value particularly well, one can always sell it on the open market and buy out the lease.