Love It Or Lease It: Should I Lease or Buy a Car?

It’s a questions that comes to all of us when considering our next vehicle. Should I lease or buy a car? We tell you how to figure it out.

By David Boldt

The Big Question

Whether to lease or buy your next car – has as many angles as director Terrence Malick’s The Tree of Life; without, of course, the benefit of popcorn, Penn or Pitt. And to frame the question as one of simple math is to assume the U.S. tax code could be replaced with Herman Cain’s 9-9-9 in this lifetime. To lease or to buy is a question whose answer requires knowledge of your circumstance, awareness of your preference and, ultimately, your comfort level with both the money and the mechanism.

Of course, with the recent collapse of the housing market leasing vs. buying takes an expanded twist, with many existing and/or prospective homeowners beginning to second-guess pulling the purchase trigger. The traditional argument: Buy an appreciating asset (historically, that’s a home) and lease a depreciating asset (historically, a car). With housing still flirting with a bottom, and the repairs and maintenance associated with ownership not getting any less expensive, leasing a home becomes more attractive for a widening audience. And those same arguments in favor of leasing a house can be made in leasing a car.

Ultimately, leasing is simply a different method of financing your purchase; lease vs. buy is reduced to personal preferences, changing transportation needs and – if used for business – the inclinations of your financial adviser. When in doubt, retain someone with ‘CPA’ after their name.

Do you have Prosecco or Champagne taste?

Here’s our hypothesis: You have $3K in cash, and would like to keep your payments around $400 per month. Coincidentally, with the transaction prices of the most popular cars (midsize sedans) and trucks (light-duty pickups) hovering in the low $20s, that $3,000 in cash should provide you with a purchase down payment, along with monthlies on the principal of approximately $400 for sixty months. And while there’s no gun to your head, you’re generally well served by keeping it for the full finance term – or at least waiting to sell until your payment schedule catches up with the depreciation; that – typically – is in excess of three years on a five year loan. In exchange for that commitment you’re entitled to drive your vehicle as if you own it, because you do own it. Buying means there are no limits on annual mileage use, and, if you ding the door or scrape the bumper, you won’t be forced to pay for the fix.

If you were to lease, that same out-of-pocket $3,000 and budget of $400 per month will significantly elevate your automotive horizons. Rather than shopping for Accord or Camry you can flirt with BMW’s 3-Series, Audi A4 or Volvo S60. The lease commitment will typically run 36 months, but will also (typically) restrict you to 10,000 to 12,000 miles per year. (You can, of course, drive more than that, but a per-mile penalty will be assessed at the time of the vehicle’s turn-in.) And while you’d want to maintain your own car in good condition during the ownership period, there’s a greater necessity to do so with a leased vehicle; again, at time of turn-in you’ll be held responsible for wear-and-tear that’s judged to be ‘excessive’. In many cases, you and the dealership won’t agree on what “excessive” means, and quite often, you’ll lose that tussle.

Basically, if your budget says ‘Accord’ but your taste runs to ‘Audi’, the lease gives you the ability to satisfy your upscale urge with a downscale budget. But you’ll also need to resign yourself to the ‘forever’ payment, while Accord and Camry owners happily drive well past their payment period.

What’s On Your Horizon?

If you envision your life – and, by extension, your transportation needs – changing within the next 2-3 years, a lease may be a more strategic response than a purchase. If you’re young, single or just married, your car can carry you and your non-fat latte’ with relative ease. Throw in two kids (and their Happy Meals), however, and suddenly the Hyundai Accent might not work. The ability to walk away within two to three years is a huge advantage of a lease. Drive it for however long you contract (again, three years is typical) and hand the keys back at that anniversary.

Conversely, if your situation isn’t likely to change for the foreseeable future, opt for the purchase. Buy it outright, or sign on for 48 to 60 months of payments, and enjoy the long-term durability (and extended warranties) that’s built into virtually every car available today. The least expensive way of owning and maintaining today’s automobile is to get it paid for and then drive it for a period at least equal to your finance contract. You may, during that time, have periodic maintenance expenses, but those are offset by your lack of a car payment.

The Business End

This isn’t an article targeting business users or intending to supply tax advice. For any CPA favoring a leased vehicle for business use, you’ll find one favoring the purchase, mileage deduction and asset depreciation. Many people who own their own businesses lease a car through their company and do reap tax advantages. Consult an adviser, wait one tax year, and see if Uncle Sam agrees with your strategy.

The overwhelming consideration is what you want to drive. If Civics, Accords or Camrys meet your automotive needs, their ownership histories suggest long term reliability and – going forward – relatively inexpensive long term care. If, however, you’re sucked in by the seductive appeal of a luxury marque like Lexus or Audi, know that their more complex mechanisms necessitate a higher (read: more expensive) level of involvement. With a luxury car you may wish to cut the relationship short, and leasing is an incredibly easy way of doing that.

Ultimately, selecting an automobile is like dating an actor. If you think you can put up with him for a lifetime, marry him. But if you think a few years are more than enough, lease him. Ms. Jolie, we think, is leasing…

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