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Comparing Car Costs: Leasing A Car Versus Buying A Car

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Money and car keysStill unsure about whether you should buy or lease your next new car? Asking some fundamental questions about how you keep and use your vehicles is a good place to start.

And if you’re a person who's only happy going with the smart-money decision, what you need to do for a more satisfying answer is run the numbers for a few potential scenarios, and estimate what leasing would cost, versus buying, in the long run.

First off, it’s hard to compare apples to apples, because most leases today are three years, while the typical auto loan has now stretched to six years.

When you lease you’re essentially paying for a new vehicle's (steep) depreciation over its first several years; but in return you're getting a new vehicle more often—and at the very least, with either a lower monthly payment or a lower down payment than leasing.

Vehicles that hold their value best are usually the best lease deals

It follows, of course, that some of the best leasing deals apply to vehicles with high residuals—that is, to the vehicles that hold their value well over time and are still worth a lot come trade-in time.

There's no substitution for simply plugging numbers in and seeing the potential payments and outlay. Bankrate.com has an Auto Lease Calculator that will help you understand how these numbers are interrelated; they additionally have an Auto Calculator that will help decide whether to buy or lease your next car.

As we'll outline here, there are some scenarios in which both your monthly payments and your down payment are lower. And that's when leasing can be the better deal—when of course you've decided your vehicle use is a good fit for leasing.

And before doing that, take a look at our quick summary of ten leasing terms you need to know before comparing leases.

Working it out over six years—two leases or one loan

Here's a typical way leasing works out—based on the roughly $30,000 average price of a new car, a four-percent auto-loan lending rate, and 20% down for the loan (recommended by financial experts if you buy) or $2,500 requested at signing for the loan.

Six-Year Loan
Negotiated price: $30,000
Amount down (20%): $6,000
Amount financed: $24,000
Monthly payment (Bankrate calculator): $375.48
Total outlay over 6 years: $33,034.56

Three-Year Lease
Negotiated price: $30,000
Amount due at signing: $2,500
Down payment: $1,500
Residual value (47% - industry average): $14,100
Adjusted capitalized cost (the amount of the lease): $14,400
Typical monthly payment (Bankrate calculator): $471.00
Total outlay over 3 years: $19,456.00
Extending this to six years, here's the total: $38,912

So as you can see, with some conventional lease terms and a conventional auto loan, for a vehicle with near-average or greater depreciation, leasing will most definitely end up costing you more in the long run.

But it's not always the case. Reconsider that same calculation with a vehicle with an especially strong residual value—here a new 2014 Honda Accord, with a 60 percent residual.

Three-Year Lease
Negotiated price: $30,000
Amount due at signing: $2,500
Down payment: $1,500
Residual value (60%): $18,000
Adjusted capitalized cost (the amount of the lease): $12,000
Typical monthly payment (Bankrate): $369.17
Total outlay over 3 years: $15,790.12

In this case, leasing costs less—even when you smartly put 20 percent down on a purchase (loan). You get a lower monthly payment. And you get to essentially swap your car for a brand-new one at the three-year mark.

Keep in mind that neither of these scenarios includes taxes. With a loan, you'll need to pay sales tax on the full purchase price of the vehicle, but with a lease you'll likely only owe taxes on the payments. There might also be other tax advantages to leasing, but you'll need to see your tax preparer or financial advisor for how that might apply.

The other big advantage of leasing versus buying is that you'll have put down less of your money up front for leasing, and with that money that you're keeping longer you could be earning interest (financial experts call that opportunity cost).

But—and this is a big but for some—at the end of a loan, you of course own the vehicle. Yes it's a six-year old vehicle, possibly with some needs, but it's most likely a vehicle with plenty of use left, and one that you can keep around as a second or third car, give to your kids, or sell as you please. Is that a big advantage? Honestly, it depends on the vehicle, its condition, and your vehicle needs.

When the leasing numbers don't work out

There are plenty of scenarios for which the numbers on leasing definitely don't work out as well. One of them is, of course when you want to lease a vehicle that has a low residual value (anticipated resale value). A number of high-performance cars fit this—so do stripped-down base models of some affordable cars.

Leasing also doesn't make as much sense for longer periods, like four years, as while the payments may be a bit lower you're responsible for wearable items like tires and brakes, and may bumper-to-bumper warranties expire at three years.

At the same time, don't agree to put more than $3,000 total down on a lease. Lenders like to 'front load' the lease, because it gives them more assurance if the lease is broken or payments are missed.

Make sure you're confident in your ability to pay through the entire lease period; remember that low-down-payment leases will often leave you 'upside down'—owing more money than the car is worth at that point. And that aspect can get you in trouble even in an accident, so make sure your lease agreement and lease includes gap insurance; that's the specialty insurance policy that covers your financial liability if the car is totaled or stolen and the regular insurance policy only covers the value of the vehicle at that point.

The subsidized lease: When it might be a no-brainer

Remember, if you get what you would consider a bargain or ‘subsidized’ lease, it’s likely built on the idea of a manufacturer incentive, offered by a 'captive' finance company, and built around a somewhat inflated residual value that's much closer to the retail value of the car at that point—or in the case of some vehicles, like the all-electric 'compliance' cars some automakers are pushing out to the market, it's likely an inflated value.

These offers tend to be a great deal—provided leasing already makes sense for you. But do keep in mind that what makes these leases such a deal typically also makes buying the car at the end of the lease term less of a deal than with a 'regular' bank lease. They also tend to hook new drivers into the three-year leasing cycle.

Finally, don’t forget that while buying probably works out as slightly more advantageous most of the time, part of what a lease offers is convenience. And for most of us, time is money.

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