Should You Lease a Car or Buy a Car?
Buying costs less — if you own your car till it drops.
By Janice Revell, Money
With leasing, you always drive a shiny new car, and your monthly payments are lower. So why would you buy?
Strictly by the numbers. A 2008 Toyota Camry will run you just under $27,000 (including taxes and fees). Buy one and finance it with a no-money-down, five-year loan at 6.9% (today’s average), and your monthly payments will be $526. At the end of five years, you’ll have spent $31,560. Say you instead pay $1,000 up front for a five-year lease. Your monthly payment will be $415. At the end of five years, you’ll have spent $25,900.
So leasing wins? That’s not the full story. If you buy a car, it’ll be worth something once you’ve paid off the loan. Your Camry would fetch about $10,000 after five years, according to estimates by Edmunds.com. That cuts the out-of-pocket cost to $21,560.
But wait:What if you really want a new car? In that case, the gap narrows. Take out a three-year loan on the Camry and your monthly payments would spike to $821, for a total of $29,556. If your three-year-old Camry sells for $14,000, your net cost drops to $15,556.
If you leased, though, your payment would be $485 a month, leaving an extra $336 in your pocket. Invest that $336 in a money-market fund paying 4.5%, and you’d earn $589 after taxes in three years, assuming a 28% tax bracket. Factoring that in, your total lease cost would be $17,871.
Also, the Camry holds its value well. With models that don’t, the manufacturer often sweetens the deal by inflating the car’s assumed value at the end of the lease term. If you buy the same car, you won’t make that much when you sell it, which could tilt the scales in favor of leasing.
Keep in mind that leases come with mileage restrictions, typically 12,000 miles a year. Plus, if you ding a leased car, you’ll get dinged with fees.
The bottom line? In the long run, buying costs you less.
Adapted from the January 2008 issue of Money. © 2008 Time Inc. All rights reserved.
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