Buy vs. Lease

AROUND 30% OF ALL new cars are leased, rather than bought outright. A big reason for leasing’s popularity: It allows cash-strapped consumers to drive cars they couldn’t afford to buy. Historically, most leases have been for luxury cars. Lately, however, consumers have been leasing less expensive vehicles, as they struggle to make ends meet and as they grow more comfortable with monthly financial commitments for everything from cell phones to music streaming services to cable TV.

A good idea? With a lease, there’s usually a mileage limit, such as 36,000 miles on a three-year lease, and insurance is typically more costly than it is for owners.

Still, leasing may prove cheaper than buying if you plan to get a new car every three years. Upfront costs on a lease, if any, should be far smaller than the down payment on a car loan, and the monthly lease payments ought to be less than a car loan payment. Because you might get a new car every three years, maintenance costs are likely to be modest and any major repairs could be covered by the warranty. And if you really like the car, you can usually buy it at the end of the lease at a preset price.

Problem is, getting a new car every three years is an expensive habit—and you’ll likely fare better financially if you buy a car and hang on to it for longer. Remember, at the end of a lease, you don’t own anything. But as a buyer, you could sell the car and use the proceeds to make a down payment on a new vehicle. Better still, you might keep the car until the loan is paid off, at which point you can enjoy driving the car with no monthly payments to worry about.

The bottom line: Over the long term, leasing every three years will be more costly than buying a new car and driving it for, say, six years. But before you rush out and buy a new car, keep in mind that there’s an even cheaper option: Purchasing a used car that’s maybe three years old and then driving it for another six years. Thanks to all the cars coming off lease, there’s usually plenty of those three-year-old cars to choose from.

Next: Invest vs. Reduce Debt

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