I get this question a lot from clients, and the answer is “it depends”. Then we walk through a series of questions to help identify the best option. If you are thinking “But wait, when you lease a vehicle you don’t own it and therefore don’t get the advantage of having equity” you are partially correct. Strategy comes into play here, so let me explain.
Let’s say you NEED a new vehicle. Expanding family, different circumstances, or maybe your current one is on its last leg. What is the right decision? Car shopping is already stressful enough. I won’t get into the concept of buying used (which can definitely be a better way to go if you find the right vehicle and the right deal) but for this scenario, let’s assume you have identified the vehicle for you, and it’s a new one sold by a dealership. We have all seen advertisements for low lease rates versus an outright purchase. I will compare the two, but let me be clear: the lease strategy (in my opinion) only makes sense if you are planning to purchase the vehicle AFTER the lease term, and the residual value is favorable to you, AND that particular make/model has a historical track record of retaining a fair market value that is acceptable over time. Let’s get to the scenarios that I have experienced first.
I am a simple guy when it comes to cars, so I go with reliability, comfort, and safety…not speed and flash. So yes, I drive a CAMRY. Yes, a Toyota. Why? Because they check all of those boxes, and in the lease buyout scenario, tend to hold their value well. So let’s assume your car of choice is $35,000 MSRP (sticker price). Don’t forget to add a few thousand for tax, title, doc fees, and registration. With a 5 or 6 year financing option, your monthly payment will feel hefty. At a 4% interest rate on 60 months, your payment is going to be $700. Ouch. Your total cost to own (total of your payments including interest) will hit just under $42k.
Now let’s assume you want to lease it first (36 months typical) at $500/month (no money down) and have the OPTION to purchase it when the lease is up for about 20k (residual value is what the dealer will call it). So at that 3 year mark, your new finance agreement is for about $23k. Assuming 60 months @4%apr, your payment will be $425 with about $25,500 total cost over the 5 years. Now add that $25,500 to your lease payments made in the first three years ($18,000), you will pay about $43,500 for the vehicle, but spread out over 8 years.
In this case, it PROBABLY makes sense to just buy it. But what about that monthly payment? What if you need cash flow or flexibility? What if you need to keep your debt to income ratio lower for a home purchase/refinance? What if you own a business and all you do is drive to meet with clients? Are we considering the lease payment deduction versus mileage deduction for tax purposes? Yep, this can get complicated. Do your homework. Do the math. And try to keep your vehicle for 8 years. Getting into a constant flip cycle will definitely cost you in the long-run. If you can find yourself with a reliable vehicle, years from now, and have zero car payments, think of what you can do with that cash.
