Should I Buy or Lease a Car?

Does it make more sense to buy or lease a new Honda HR-V? Image source: Honda

Does it make more sense to buy or lease a new Honda HR-V? Image source: Honda

A few months ago, I ran a “thought experiment” to answer the question: should I buy a car or use car sharing services? I was a bit surprised to find that the answer really depends on a lot of factors that surely vary from person to person.

With this in mind, I thought I would run another calculation to look at the numbers behind buying vs. leasing a car. I was always taught growing up that it is better financially to buy a car than to lease a car. Having never looked at the numbers for myself, I thought it was time to put this to the test.

The assumptions

I’ve actually been thinking about buying a new car for the last year or two. I’ve had my eye on the new Honda HR-V since well before it came out. Because of this I decided to use the new HR-V as my test case car. Based on the information on Honda’s website, a 2016 HR-V AWD LX retails for $21,165. Again based on Honda’s own models, that same car would lease for $282 per month for a 36 month lease with $2,500 down.

I assumed that both the buy and lease options would have various taxes and fees added onto those numbers, but assuming the taxes and fees are roughly equivalent for both options I have ignored them in my calculation.

This calculation also does not account for maintenance or insurance. From what I understand, basic maintenance is often included in a lease, thus potentially reducing the overall cost of leasing. I also understand that insurance can be higher on a leased car, thus potentially increasing the overall cost of leasing. Since these factors are difficult to assign values to, I have ignored them in this calculation.

I found car deprecation information using this calculator and I am using the average depreciation rate in my calculation. I am assuming that after the end of each analysis period (three or nine years) the car is sold for the purchase price less depreciation.

Finally, I assumed that this car is being purchased outright with no financing. Adding financing costs to this analysis would substantially alter the outcome.

Three year analysis

First, I looked at how the cost to lease vs. buy compared over a three year period. I chose three years because that is a fairly typical lease term. See the chart below for the complete calculations.

buy vs lease 1

You can see that leasing is more expensive on a yearly basis than buying even over a relatively short three year period. Over a three year time frame, you would pay about 1.5 times as much per year to lease this car as compared to buying it outright and then selling in year three.

Nine year analysis

Next, I looked at the same analysis over a longer time horizon. Conventional wisdom holds that a car becomes more affordable the longer you hold on to it (in terms of yearly cost to own), so I wanted to see how this would affect the lease vs. buy analysis. I assumed that in this nine year period there would be three separate leases, each for a 36 month term. I have escalated the down payment and monthly payments at a rate of 3% per year to account for inflation. This assumes that the vehicle is not upgraded at each lease turnover (i.e. trading a Honda for a Mercedes), but that the current year model of a similar car is leased. See the chart below for the complete calculations.

buy vs lease 2

As you can see, the premium in terms of cost per year really jumps when you look at a longer time horizon. Over nine years, you’re paying more than 2.5 times as much to lease cars as compared to buying a car.

Intangible factors

This analysis demonstrates pretty clearly that, from a purely financial perspective, buying a car is better than leasing. Furthermore, it demonstrates that the longer you hold onto a car that you purchase, the better off you are. This confirms my initial hypothesis.

Of course, there are always those factors that are harder to quantify and complicate a decision. For example, in the nine year analysis, you’re looking at driving a nine year old car. I have no problem with this, but you might. It is possible that this older car could cost substantially more to maintain, thus undermining the financial value of the buy and hold decision.

It is also possible that come time to sell, there won’t be a market for such a car. I can especially imagine such a scenario given the rapid advancement in car technology, specifically highly fuel efficient/electric cars and self-driving cars. One way to be sure not to run into this problem is simply to drive your car into the ground, which is the most financially beneficial choice possible.

You may also feel that you need or want a new car every few years. I would strongly advise questioning this desire (why would you possibly need a new car every three years?), but it is possible that this is truly essential to your lifestyle. In that case, you may not care that it costs more over a lifetime to lease, and that’s your choice.

What should I do with this information?

For me personally, I’m taking this analysis as confirmation that it is in fact better to buy a car outright than to lease. I don’t care much about having new and fancy things. Heck, I’m still driving a 2004 Honda Civic that has seen its share of wear and tear.

For others, I think it can sometimes be easy to see only the upfront costs and therefore think that leasing is better than buying a car. Surely putting $2,500 down today is better than shelling out $21,165, in cash no less! I hope that this analysis shows that it is important to consider the lifetime cost of a car, and not just the upfront costs.

But what if I don’t have the money to buy?

If you’re convinced that it is better to buy than lease, you may still be wondering how it is possible to buy. Most people don’t have $20k+ in cash lying around. I don’t have $20k in cash lying around!  This is when it is time to look at options. Can you defer buying a car until you can pay cash? Continue driving your junker or taking the bus for a bit longer until you can save up some cash. Can you afford a used car? Used cars are substantially cheaper and a much better value than new cars (which depreciate most in the first few years).

Finally, and I am loathe to suggest this as I don’t believe in financing anything but a home, there are of course car loans. If you truly need but cannot afford even a cheap, used car, perhaps you can finance an inexpensive car and try to pay off the loan as quickly as possible.

What do you think? Do you buy or lease cars? Why?


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29 thoughts on “Should I Buy or Lease a Car?

  1. As alluded to the final paragraph, you mention that people may not have the $20k+ in cash and that they may have to take out a loan. I think you could certainly write a post on that! Car Loan vs. Car Lease!

    For me, I don’t ever want to have a car loan or a car lease. Car’s can rarely ever appreciate in value: the second you drive off the lot it is worth less than you paid for it. (ex. 1950 Mustang) If you have a car loan, it is almost like giving the bank money for free!

    Thanks for the article and have a nice day,
    Erik

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    • That is a great idea – I’ll definitely write about car financing in the future. I am generally in agreement that car loans and leases aren’t for me. Used cars, paid in cash are the way to go!

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  2. I just think leases are a terrible idea. I see the allure, I suppose, but you still have a monthly car payment. As for repairs, from what I understand most cars don’t need many repairs in the first three or so years. So there probably isn’t a lot of savings there. I know you didn’t factor that into your calculations; I just think it’s one point people use to justify leasing.

    And don’t forget that you’ll be offered an option to buy the car at the end of your lease. I think a lot of people are probably tempted by that. I’d be interested to see what the car ends up costing if they take that option. But that’s probably not something the dealership would be upfront about.

    Like you said, you can buy used. And financing isn’t the worst thing, though you should definitely go through your bank instead of the dealership if possible. We got a 2012 Honda Civic with just under 25,000 miles on it last September. There were some cosmetic issues (chips in the paint in several places) so we got it for $14,000 including everything. The lowest offer we got a on new Civic was $19,000ish.

    In the end, I think leasing is really just for those who want to have the latest car. Maybe it’s their one splurge, maybe it’s flat-out ego or perhaps their work relies on image. In those cases, I guess I get it. I still think it’s a huge waste, though.

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    • Thanks for all of your thoughts! Really good point about maintenance in the first few years. I think you are absolutely right that during the first three years, cars need little more than oil changes. That helps balance out the maintenance covered under a lease.

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  3. I know this isn’t well received in the PF community, but I am a car leaser; however, it’s mostly for work purposes and I think that cars are just a terrible investment in general. We own my hubby’s car and it seemed like once it was paid off $1,000+ maintenance bills kept coming in. That being said, they were still less than a car payment. I think a great option is buying a new to you car from a location that will offer you a 2-3 year warranty as part of the package.

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  4. We keep cars until they die, so we’re buyers over here. Leasing a car makes zero sense to me, plus I hate paying bills! The last thing I would want is a perpetual car payment for the rest of my life.

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  5. Buy. Every time. Leasing is for losers. I have a 2005 Honda Civic, and I’m about to sell it. Not because it’s in bad shape at all, but because we don’t need two cars.

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  6. I didn’t like the idea of financing a car until recently. There is a company called Lightstream that I used to get both our car loans. I have a pretty high credit score so I was able to land a ridiculous interest rate (like 2.25%). Even if I had 100% of the cash I would be stupid to not take out the loan because of how much more I could gain by investing the cash.

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    • Interesting. I’ve never heard of Lightstream. I know that some people finance cars because they feel their money can earn more elsewhere, I just always feel like it is a bit risky and involves timing the market. But that is great that it is working well for you!

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  7. I know this is a little crazy, but a similar analysis (that I’m having trouble finding) has convinced me that the next car we buy will probably be twice as expensive (or more) than any other car we’ve ever bought. Car repairs/replacement run us around $2400 per year, but if we buy a car that is only 2-3 years old, we will reduce that amount by about $600 years over the life of the car.

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    • Interesting. I’d be very curious to see that analysis. Maintenance costs do tend to mount as a car gets older, so I could see how a newer model might save quite a bit of money.

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  8. I agree that it’s much better to buy a car than lease it from a financial standpoint but I understand why some people do it. I would never lease because I have a child and I don’t want to run the risk of him eating messy food or doing something to mess up a car that I have to return in 3 years. Vehicles depreciate in value so quickly that often when you finally finish paying the car off, the value has plummeted and the mileage is high. This is why I’m a big fan of saving up and buying a car in cash if possible. My used 2010 car was a little less than $11,000 so I know it’s possible for me to pay in cash next time around if I start preparing early.

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    • Great point. There are so many little things that can go wrong with a car and really mess up a lease. If you own your car, you can just make due with things as is without stressing.

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  9. I’ve never been a fan of leasing a car. While I have never conducted the detailed analysis that you have, my conversations with those that have led me to conclude long ago that it was the poorer option from a financial perspective. Beyond the financial implications, ‘borrowing’ a car for x years doesn’t appeal to me. Even if the financial advantages of leasing slightly outweighed buying, I would probably choose to buy.

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  10. I’ve never really understood why people lease, but I agree with Erik – it would be interesting to see a comparison of leave vs loan, since very few people can buy a car outright with cash.

    I’ve actually had my car for 7 years and am hoping it makes it 7 more. I just started saving up for a car so when it is time to buy a new one, hopefully I can do it with cash and not worry about loans.

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    • Great idea to start saving for a car so far in advance. I’ve also been saving for my next car for several years so that I can purchase it outright.

      I’ll work on a lease vs. loan analysis – it will be fun to see how it compares!

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  11. I would never lease a car because the inability to build vehicle equity goes against my degree in Finance. My professors would be ashamed! Haha

    I would love to see you write a new vs. used post too! My husband and I aren’t not opposed to buying new (I know, I know) but it has to be a downright incredible deal for us to do so. We purchased our last vehicle brand new because the holiday sale combined with applicable incentives (grad discounts) brought the price down to that of a used vehicle. The dealership was losing money by the time we left!

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    • Wow – sounds like you got a great deal! I’ll work on a new vs. used analysis. I agree it would be really helpful to see those numbers.

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  12. I’m probably in the minority, but I believe in buying a new car and driving it until it dies. I have a 2004 SUV that was purchased new and with the help of my parents, had 0% interest for 5 years. My car only recently had to have surgery ($1300) in addition to regular maintenance. My car is 11 years old now and I think I can get a couple more years out of her. To me, this was a win – win situation. I have definitely gotten my money’s worth!

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    • I think that approach can work well. The driving it into the ground part is certainly smart. I bought my 2004 car used and am still driving it. It isn’t so pretty anymore, but it still works!

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  13. I’d definitely recommend purchasing a car which is 2-3 years old. This way the car will have depreciated by a reasonable amount yet if it’s been serviced and maintained by a reliable, professional car mechanic or car garage then it will still be a good quality, leaving you with a higher overall degree of control in the car’s future lifespan. Great post guys, this is just my 2 cents and contribution to a fantastic collection of tips and advice for buying or leasing a car.

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