Should you buy or lease a car?
When you buy a car, you pay to own it. You can either pay the full purchase price upfront, or finance the car by taking out a loan. On the other hand, when you lease a car, you are renting the car for a specific amount of time, and you have to return it at the end of the lease term.
Buying vs Leasing a Car
Depreciation
Depreciation is the decline in a car’s value over time. The age of a vehicle and its mileage are the best predictors of a car’s depreciation.
When leasing
Depreciation determines the monthly lease expenses.
Calculator: How much will you have at retirement?
When buying
Buyers will choose a car model that retains more of its original value. Depreciation also determines when the buyer decides to sell the vehicle.
Residual value
Residual value is what the car is worth after it has depreciated: when you decide to sell the car or when the lease expires.
When leasing
All else being equal, a vehicle with a higher residual value is going to cost less money to lease since the owner does not have to make up for high depreciation losses.
When buying
The residual value can predict your vehicle’s value at the time you plan to sell or trade it in.
Components of a Lease agreement
Buying a car
Typically, cars lose their value every year. Most cars lose 10% of their value as soon as they are driven off the lot.
Some cars are good investments, but they tend to cost quite a bit of money up front.
2002 Ferrari Enzo
New = $400,000
Today = up to $2,800,000
However, other luxury cars can lose their value quickly.
2004 Maybach 57
New = $300,000
Today = $87,000
