The decision to buy or lease is complicated, yet both methods have merits. For example, you’ll generally have a higher monthly payment (for the same car) when you buy compared to when you lease; however, the car is your property when you buy. On your net worth statement, you’ll record a new asset (the car) and a new liability (the loan). You can sell the car at any time. Depending on the price at which you sell your car, you may be able to pay off the rest of the loan, if you haven’t already.
When you lease, you essentially finance the difference between today's sale price and the estimated value of the car at the end of the lease. Therefore, you save some money because you’re not going to pay interest on the entire amount of the value of the car. Additionally, you only pay sales tax on this amount, not on the entire value of the car, which makes leasing a way for many people to drive a car they could not afford to buy in the short term. In the long term, leasing is always more expensive than buying.
Leasing may make sense for you if you:
You get a new car every few years and avoid the expense of major car repairs. The depreciation of the car, which is very high in the first couple of years, does not affect your lease. You can arrange for small monthly payments. If the car is for business use, a lease is considered an expense, not a capital cost, which means you can claim the leasing cost (up to a maximum) against business income. With the capital cost allowance, you can only claim a certain percentage of the initial cost of the car each year.
It is expensive and difficult to break a lease. Additional fees are charged if you exceed the pre-set kilometre limitations. A buyout at the end of the lease may exceed the value of the vehicle. Some companies charge interest rates of up to 15% (the interest rates change depending on the movement of the prime rate).
The cost of a car, not the decision to buy or lease, is the biggest determinant of your financial situation because it affects your available cash flow. Buying or leasing more cars than you need or can reasonably afford will have a negative impact on your financial situation. Remember, just because you get approved to lease or buy a BMW doesn’t mean that you have to buy it. Cheaper, reliable transportation will benefit you financially in the long run.
The following is only an example. Leasing and interest rates vary. See your auto dealer or financial institution for specific quotes or information.
Let’s say a new car costs $35,000. Both methods, buying and leasing, require a $5,000 down payment and are financed by the car dealer. The terms of the lease are as follows: three-year term, 24,000 km per year mileage maximum; $800 in lease fees are involved. The monthly lease cost including taxes is $504.71.
Financing the car requires the buyer to pay taxes on the car in one lump sum ($5,250) and to pay $606 per month for five years. We assume that insurance, service and fuel costs are identical and therefore, are excluded from the totals.
After three years, the lease has cost $23,969.56. The car is returned to the dealer with 80,000 km on it, which exceeds the 72,000 km that were allowed by the contract. This overuse results in a charge of $2,000, increasing the cost of the lease to $25,969.56.
After three years the financed car has cost $26,816. There remains $14,544 in payments over two years or an outstanding loan balance of $13,400. However, the buyer of the car owns a car worth $20,000. The car could be sold, the loan paid off and the buyer would keep $6,600. The total cost to finance (or buy) over three years is $20,216, which works out to almost $2,000 less per year.
While any number of variables could affect these calculations, it makes sense to explore both options and compare them in this manner before making a decision to buy or lease a car. In addition, you should consider the other costs of ownership. An SUV costs much more for gas and tires than a compact car. Insurance is also higher for some types of cars than others. Investigating all these things can save thousands of dollars over the course of just a few years.