If you’re like most Americans, buying a car will be one of the largest investments you’ll make in your lifetime. However, buying a car is not like buying real estate or investing in stocks. The key difference is that cars are steeply depreciating assets that will almost always lose half of their original value by the end of the third year of ownership. Even the owners who are most attached to their cars must realize that there is no escaping the unstoppable march to worthlessness that every car begins the second it drives off the lot.
Most people view leasing a car as being not much different than a rental. And this view is mostly right. However, unlike with renting an apartment, where it would almost always be preferable for those who can afford it to own a home rather than rent a space to live, leasing a car has some highly attractive features that make it a viable choice, even for those who could easily afford to buy a car.
The drive-off costs of buying versus leasing really aren’t even comparable. That’s because buying, depending on the price range of the car, will often cost thousands of dollars or more, before you leave the lot. Leasing, on the other hand, usually only requires a small security deposit and nominal sales tax. A typical lease will cost you a few hundred, and you’ll be driving home in a brand new car.
But the real savings of leasing versus buying come from the often drastically reduced costs you see every month, in the form of a lower payment. A typical $35,000 car will typically have monthly lease payments of around $450. But that same car will have loan payments of around $800. Over the course of a 36 month lease this can save over $12,000 in monthly payments.
The reason that is most often given for why people shouldn’t lease a car is that they will not own it. But how much of a disadvantage is this, in reality? To be certain, there are some restrictions with leasing that may not be ideal for every driver. The main drawback of leasing is that there are often mileage restrictions imposed per month or per year. Going over these allotted miles can cause the lessee to quickly start incurring surcharges that can add up to big money. For this reason, it’s imperative to understand the maximum miles allowed under the lease agreement. For some drivers, especially those who are frequently on the road for their jobs, this may make leasing an unattractive option.
However, lease agreements are designed to work for most drivers. The allotted miles are usually generous and would be difficult for the typical driver to exceed. But there’s one other major drawback to not owning the vehicle. You don’t get to recoup the residual value of the car when it comes time to get a new one.
But here’s where advocates of buying new vehicles can lead many consumers astray. The truth is that selling a car is hard work, and it can be very tricky business. Selling a car involves a great deal of work. This includes readying the car for sale, advertising, and dealing with prospective buyers. In some areas, there can be considerable personal security risks. The process of selling a car can easily take 50-100 hours. This raises a serious question. Is trying to play used car dealer actually worth it to the average driver? Let’s just look at this from a time value perspective to try to get an idea.
Say you earn $30 per hour at your job. If selling your car takes 100 hours, that will be $3,000 worth of your time. Is that worth it? Maybe, but keep in mind that leasing would have already likely saved you more than $10,000 over buying. In most cases, letting the dealership sell your car will be the higher value option.