Deciding between leasing and buying a new car is a significant financial consideration for many. When you acquire a new vehicle, whether through leasing or purchasing, you immediately encounter the steepest part of its depreciation curve. While the lease-versus-buy decision has nuances, the primary financial impact stems from owning a new car in the first place. The appeal of older, well-used vehicles, often referred to as “fart cars” in informal contexts, lies in their already depreciated value, offering substantial discounts while still retaining the automaker’s expected residual value.
Many perceive “savings” in their willingness to drive older vehicles. For instance, at the end of a lease term, a lessee has the option to buy the vehicle at its residual value and continue driving it. This can indeed “save money” compared to entering into a new lease agreement at that point. Similarly, someone who finances a vehicle from day one benefits most by keeping it for more than three years. Trading in a three-year-old car for a new one with a new loan often negates potential savings.
Ignoring electric vehicles (EVs) for a moment, the simplest way to compare leasing versus buying is to examine the money factor (MF) against the annual percentage rate (APR) of a car loan. If the MF is heavily subsidized—around 0.0015 or less in the current market—and there are no loan subsidies, leasing often becomes the more financially sensible option due to the lower implied interest rate.
If the MF and loan APR are comparable, leasing is often still advisable. This is because a lease typically involves lower monthly payments as you’re not paying down the principal, unlike a loan. While a loan allows you to build equity in the vehicle, this equity can be disadvantageous. The opportunity cost of having equity tied up in a depreciating asset means that capital isn’t available for other uses or investments.
It’s crucial to remember that a lessee always has the option to purchase the vehicle at any point, effectively converting the lease into a financed purchase to capitalize on potential equity. Conversely, they can return the vehicle at lease end if the residual value is higher than the market value. However, a buyer with a loan is always exposed to depreciation without the flexibility to easily exit the financial commitment.
Optionality and lower opportunity costs are key advantages of leasing, making it a valuable tool for the right consumer. However, if the MF is excessively high, such as when leasing luxury or high-demand vehicles, leasing may not be financially sound. Conversely, a very low MF strongly favors leasing.
For EVs, the initial $7,500 federal tax credit often makes leasing attractive. However, lease programs for EVs sometimes feature inflated money factors to offset this incentive, as seen with some Mazda and Volvo programs. In such cases, leasing initially and then buying out the lease with a loan can be a strategic approach.
In some instances, EV residuals can be disastrously low in real-world scenarios. Automakers may subsidize lease residuals on certain EV models, like the Mercedes-Benz EQS and Audi e-Tron, to make leasing more appealing. In these situations, bearing the risk of rapid depreciation through ownership is often unwise.
In summary, deciding between leasing and buying new vehicles ultimately hinges on comparing the money factor to the loan APR and understanding how residual values impact your specific situation. To truly save money, consider keeping your vehicle well beyond the typical lease or loan term.
For a detailed lease vs buy comparison, resources like the Leasehackr calculator can be invaluable, although they may not fully account for opportunity costs or long-term repair and maintenance expenses.
