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.
Podcast: Rent vs Buy
Buying vs Leasing a Car
|Own the vehicle||Return car after several years*|
|No mileage restrictions||Annual Mileage Cap*|
|Repairs and maintenance**||Dealership covers maintenance*|
|Sell or trade anytime||Early termination fees*|
|Higher monthly payments||Lower monthly payments|
|Taxes paid upfront||Taxes paid monthly|
|**Warranty offered typically for first year of purchase.||*Dependent on lease terms.|
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.
Depreciation determines the monthly lease expenses.
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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 is what the car is worth after it has depreciated: when you decide to sell the car or when the lease expires.
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.
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
|Lease Term||Length of lease. Typically 24 to 36 months.|
|Drive-off Fees||The down payment due at signing (includes DMV fees, taxes, and first month’s payment).|
|Money Factor||The interest rate.|
|Number of Miles||Usually 10,000 or 12,000 miles per year.|
|Security Deposit||May be waived depending on driver’s credit rating.|
|Acquisition and Disposition fees||Fees for setting up or ending a lease.|
|Lease Payment||Monthly payment that consists of depreciation, interest, and tax.|
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