Aside from buying a house, buying a car will be the largest investment most Americans will make, over the course of their lives. But unlike a house, a car is a heavily depreciating asset. On average, new cars will lose between 15 and 30 percent of their value in their first year. This means that a $50,000 car may lose as much as $15,000 of its value, one year after its purchase.
This doesn’t mean that buying a new car is automatically a bad deal. If you have a strong need for an absolutely reliable car that will still be under warranty, as many people who rely on their vehicles for work do, buying a new car, especially a more economical model, may still be a good investment. But you should always also be aware of the options that leasing a vehicle provides. For many, there are a few reasons that leasing may be a far better deal than taking on the risks and costs of ownership.
When you buy a car, even on a bank loan, you can expect to see large up-front costs, especially when purchasing newer vehicles. Some dealerships, usually ones selling much higher mileage used cars, may offer zero money down promotions, but these usually turn out to be gimmicks on closer inspection, simply adding the costs into the monthly payments.
Leases, on the other hand, really don’t require any money down. The up-front costs with leasing usually only include a small security deposit and a few nominal fees, amounting to a couple hundred dollars. The down payment and other drive-off costs of getting a $30,000 car on a bank loan can easily run into the high four-figures.
But the biggest reduction that you’ll notice, each month you make a payment, on a lease versus a purchase is that, all else being equal, your lease payments for any given car will be considerably less than your purchase payments. Let’s look at a real world example for illustration.
Today, on average, if you were to buy a BMW 325i, you can expect a monthly payment of about $760. To lease the same vehicle, your monthly payment will be just $480. That’s a savings of $280 every month you drive the car. Another thing to consider is that people with worse credit may be getting hit with far higher interest rates on loans. Their lease payments may also be slightly higher, but they won’t be anywhere near what paying one of the top interest rates will produce.
Not owning the vehicle is one of the main reasons often cited for not leasing a car. On taking a closer look, however, the benefits of ownership are illusory for most people.
The main benefit of ownership is the ability to recoup the residual value of the car when it’s time to get a new one. But there are two problems with this. The first is that most cars will lose half of their original value by the end of the third year of ownership. This leaves you with a much depreciated asset that you still have to market and sell. Also, remember that the lease payments have been far lower than bank payments would have been. In the example of the 325i, by the 36th payment, you would have saved over $10,000 by leasing versus buying.
But the real problem comes with actually selling the car. Dealerships employ tens or hundreds of highly trained technicians, talented sales staff and finance experts, as well as many lower skilled people to clean and detail cars, readying them for sale. Are you prepared to take over that job? If you aren’t, you shouldn’t expect to get the maximum value for your car when you sell it.