# Leasing vs financing cars



## Happyfamily (Apr 15, 2014)

I have never been able to understand leasing a car because nobody could give me a concise, lucid explanation of the difference between leasing and borrowing to own.

With enough reading I see now that when you own, you pay for the entire car, and at the end of the loan you have equity in the car - that is, you own it and can sell for whatever it is worth.

At the end of a lease, you turn the car back in and have no equity. So for example, let's start with a car worth $30K, and for easy math let's say it is worth $10K at the end of the lease or loan. If you borrow the money for the car, then you are borrowing $30K. If you are leasing the car, you are only financing roughly $20K, so of course the lease payments are lower than the car payment. But the person making the loan payments has a car they own worth $10K at the end. The person leasing has nothing. 

That is so simple! When you buy, you finance the whole car and you own it in the end. When you lease, you finance only what amounts to depreciation on the car, and you don't own the car at the end of the lease. Isn't this an old story that is similar to renting vs. buying a house? Renters build no equity whereas homeowners do. Nobody would compare the monthly rent vs. the monthly mortgage to see which was superior financially. 

I've had people telling me that their decision was based on a comparison of the monthly payments, which is obviously not the right comparison if you want to know which is less expensive. Consumer Reports says it is almost always more costly to lease when you make the right comparison. 

Buying vs. Leasing Basics | New Car Buying Guide - Consumer Reports


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## pb76no (Nov 1, 2012)

First, you can't compare lease vs. finance on a car with mortgage vs. rent. Houses go UP in value, cars only do once they achieve collector's status. You don't really build equity in a car like you do with a house.

But on the car, I think one of the main distinctions is how long you expect to keep the car. Take a look at 
Kiplinger - 5 myths on leasing

Honestly, buying a new car vs one that is say 1-2 years old is paying an unnecessary premium.


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## badcompany (Aug 4, 2010)

Too many variables....
Typically a lease is a flop, but lately there are some good deals available that made it make sense.
For some reason, the used car market is completely stupid in our area, people fight over 3 year old lease returns while there are brand new vehicles on the lot for sometimes only $3k more. 
I leased a 2011 Subaru Forester, did Subaru's online lease special and got a great price but had to wait 2 weeks for it to arrive. 
In the end, It cost $600 more overall by going with the lease and then buying it out at the end of the term with a 3 year loan, but it saved me $100/month. Part of it is our states tax structure, when you buy, the sales tax-over 9% in some area's, is charged all at once and becomes part of the loan amount and you pay interest on that for the life of the loan. With a lease I am only charged tax on each "installment". The buyout was $13k and book is still $19k on it, the dealer was itching to have me turn it in and do another lease and I was like "no way Jose". 
Stbxw's Honda was the same way, 3 year old cars on the lot for $15,000 and only a couple to choose from, but 80+ new ones the dealer was dying to move. Got them down to $16,700, and threw in the all weather mat set and oil changes for the term of the lease. Payment is cheaper than our cell phone bill was, with a buyout about $4k less than end of term value.


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## tennisstar (Dec 19, 2011)

I bought a new car because it was only a few thousand more than a used car. I have had it for 5 years and hope to keep it a few more. With leasing, you don't have any equity; however, you also don't have any negative equity. I have ended up with negative equity several times, which isn't too fun. 

As far as buying versus renting, I have done both. However, I have ended up with negative equity there too. I had an apartment for 5 years. The rent was about $950 month. Of course, I walked away with nothing. I bought a house, spent about $10k on improvements and paid about $1100 month for mortgage. So I spent more monthly and put $10k into it. Now, 9 years later, it is still worth less than I paid because the neighborhood went downhill and in my city, housing prices don't run up. I rent it out -can't sell it without taking big loss. So I ended up losing on that deal. I live in another home in a better neighborhood and pay about $1350 month mortgage (housing is less expensive here). I have put$40k into this house though. 

So leasing, buying, renting...you just never know who will come out ahead.
_Posted via Mobile Device_


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## Duguesclin (Jan 18, 2014)

You can't really compare leasing a car to renting a house. Lease a car and you still have to take care of the maintenance. Rent a house and the maintenance is included.

I know it takes some knowledge about calculating cash flows, but the answers to those questions are pretty straight forward.
Leasing a car is the most expensive solution followed by financing, buying it cash is the least expensive.
For a house, I think the jury is up and it depends a lot on how much the real estate appreciates and how much maintenance you have to cover. You cannot do a straight comparison between monthly rent and monthly mortgage payments. Replacing a roof or installing a new furnace is not cheap.


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## DTO (Dec 18, 2011)

pb76no said:


> First, you can't compare lease vs. finance on a car with mortgage vs. rent. Houses go UP in value, cars only do once they achieve collector's status. You don't really build equity in a car like you do with a house.
> 
> But on the car, I think one of the main distinctions is how long you expect to keep the car. Take a look at
> Kiplinger - 5 myths on leasing
> ...


I'm iffy on the implication that excess mileage hits car owners just as hard as lessors. I just looked at a Civic lease - $2k down, $159 per month for 36 months with $0.15 per excess mile penalty. If you drive 20k per year (easy in SoCal) you will pay $100 per month worth of excess mileage charges (60% over the original payment). Has your car depreciated 60% more for those extra miles? Not likely.

Look at it this way. Let's say I lease this Civic, drive 20k miles per year, and turn it in at the end. All else being equal, I will have to put another $2k down, pay another $259 per month average, and have $0 equity after six years (two lease cycles). 

But, I can put $4k down and pay $259 per month for 5 years (not 6) and *own* the car when the loan is up. I could drive the car for another year payment-free and sell it for $7k (a good deal is $19k new). I am $10k better in that 6th year.

I know when buying the car you are paying more, sooner (with the benefit in the future) and driving an older car with more risk. But those issues are not worth $10k on a strictly financial basis. 

I would not lease a car unless I was within that standard mileage allotment and it was open-ended (where I can buy the car at the end for the residual value and benefit from any value generated).


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## happy as a clam (Jan 5, 2014)

Some people like to get a new car every three years or so. Many leases offer deals that cover all of the routine maintenance during that three year period. Just depends on whether you want to keep driving new cars or own it outright and drive it for years.

Personally, I have both. I have a 13 year old car that was paid for years ago and is still running fine. Although I have had to spend on a few pricey repairs lately. I also have a new car and the lease is up on it this summer. I have not had to spend one penny on maintenance; everything has been covered at the dealership.

Rather than turning the car in at the end of the lease, I have sold two cars on my own, paid off the lease, and ended up making some extra cash. So leases aren't always a losing deal.

When this lease is up, I will probably lease another.


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## DTO (Dec 18, 2011)

pb76no said:


> Honestly, buying a new car vs one that is say 1-2 years old is paying an unnecessary premium.


This depends on the car. In my area, the market for compact cars is strong. My sense is that people aren't savvy shoppers and assume this is so without analysis, and/or simply cannot afford new but want something current so they pay what is asked.

Looking at my Civic example, you can pay $20k sticker for that car new. A 2012 version was on sale at $16,600 with 45k miles. That is a 17% off for a car that is at least 20% used up. That is a bad deal, because the new car is going to have all those trouble-free miles and more warranty to boot.

OTOH, I saw a 2012 BMW 328 for $24k - definitely a good deal vs. the new price.


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## Happyfamily (Apr 15, 2014)

DTO said:


> Looking at my Civic example, you can pay $20k sticker for that car new. A 2012 version was on sale at $16,600 with 45k miles. That is a 17% off for a car that is at least 20% used up. That is a bad deal, because the new car is going to have all those trouble-free miles and more warranty to boot.
> 
> OTOH, I saw a 2012 BMW 328 for $24k - definitely a good deal vs. the new price.


Yeah, I have been watching for a while and can see how both the general economy and fuel prices matter with this. The high fuel economy cars hold their values when fuel prices are high. In a bad economy people can't take a risk making payments on a Hummer, so there is more demand for economy cars. 

*pb76no* - this is really super complicated with leases having what they call a "money factor" - something they have apparently invented in order to confuse us and make comparisons difficult. My eyes glaze over and all I hear is blah blah blah...

That article is really easy to cut to the core with common sense. On very short time horizons, we rent instead of buying. Going to Vegas for a three day week-end? Rent a car there instead of buying. lol. 

As the article showed, when the car loses half its value in three years, it can be better to lease. In my little world these are exactly the wrong cars to be buying in the first place - the ones that drop like a rock in value.


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## DTO (Dec 18, 2011)

Happyfamily said:


> *pb76no* - this is really super complicated with leases having what they call a "money factor" - something they have apparently invented in order to confuse us and make comparisons difficult. My eyes glaze over and all I hear is blah blah blah...


Yes, that's exactly what they do. "Down payment" becomes "capitalized cost" and "interest rate" becomes "money factor".

But, at the core it's pretty simple. A lease is just a type of loan where you don't pay off the balance at the end of your periodic payments. Loans have five inter-related parts, take any four and you can calculate the fifth:

* The amount borrowed (agreed-upon cost of the car, plus any taxes and fees, less the down payment), which is the same for purchases and leases.

* The loan balance when payments are finished ($0 for a purchase, the "residual value" for a lease).

* The payment amount.

* The number of payments.

* The interest rate.

The big print tells you the payment amount, number of payments, and down payment. The fine print tells you the cost of the car and residual value. With Excel, a cheap calculator, or $10 smartphone app you can calculate the interest rate yourself.

Two things to note: you can bargain over the interest rate based on your credit score. Also, you can bargain over the car price upon which the lease payment is based, just as if you were haggling over the purchase price of a new car.


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## Happyfamily (Apr 15, 2014)

DTO said:


> A lease is just a type of loan where you don't pay off the balance at the end...


That's a great way to say it.


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