Should I Buy or Lease a Car?

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.

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.

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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