Leasing vs Buying 101

[Whttiger25]

Leasing vs. Buying is a topic that has come up numerous times in all automotive forums. Whenever the question comes up as a new topic, the poster is usually flamed for not reading old threads - and justifiably so, as usually the question is a repeat of prior questions.

What I want to do here is not ask, "What's better, leasing or buying?" Instead, I want to present a financial analysis of the two that I performed when deciding what was best for me, and let that be a launching point for others to tweak all the relevent variables for their own situation and perform their own analysis. For my situation, I have concluded financing is a better option.

I would encourage others to analyze their own unique situations and post their conclusions in this thread. Maybe it will become a sticky

Usually, the arguments on this topic focus on leasing being comparable to financing cost-wise, as long as you buy the appropriate number of miles and desire a new car every 3 years.

I ran a typical scenario for those buying F8x's. MSRP of $75,675, and Negotiated price $71,125, which is roughly $1000 over invoice. Tax rate is 9.5%. Residual 62%, MF 0.00129, 36 months, $50 down (whoops! forgot to clear that out, but inconsequential), $995 acquisition, $600 in dealer fees and registration. For the finance scenario, I went with 60 months at 1.9%, and set the down payment such that cash due at signing to be equal to the lease with SDs (about 10%).

I had internal debate over what to do about Security Deposits. The fact is, they have a substantial impact on the cost of the lease, but you are tying up cash for which you could earn return on investments elsewhere as well. I decided to run this scenario including 7 SDs, but back out that effect after.

Here are the results including 9.5% tax, assuming tax only on payments. States that require full tax on leases to be paid, I am not accounting for that but just assume it makes leasing more expensive than I indicate here.

Lease
Payment: $869.39
Due at signing: $$7,819.39
Security Deposit: $6300
Annualized return on SD: 10.92%
Financial cost of lease: $4,842.08

Buy($7219.39 down):
Payment: $1,235.47
Due at signing: $7819.39
Financial cost of buying: $3,465.49

Keep in mind, the acquisition fee + tax is added to the lease financing cost, because acquisition is an added expense vs buying.

You have earned 10.9% on that $6300 security deposit for 3 years, and those benefits have already been included in the $4800 lease cost. What could you have earned in the general stock market? long term suggests 8%, but since we are talking about a 3 year window, 3 year treasuries are currently yielding 1%. Accounting for that range of possible returns the lease cost is somewhere between $5030 and $6500 depending on the optimism of your returns investing over the next 3 years, vs a cost of $3500 for buying.

So at my first pass, Financing is at least $1500 cheaper than leasing. Keep in mind, however, that the term of the loan is 5 years, while the term of the lease is 3 years (which makes buying look even better). If you were looking for a true apples-to-apples comparison you would want to finance over 3 years, which would lower the rate to 0.9%, increase the payment to $1990.20 a month, and decrease the total finance cost to $984.73. However, people are probably not comfortable paying $2k a month. You could pro-rate the cost of the lease to 5 years, which would make it's cost start at $8333 (vs $3500), or you could prorate the finance cost to 3 years, making it $2100 (vs $5000).

There is a problem - all I've proven is that leasing has higher direct financial cost than financing. You end up tying up more cash buying and you need to account for that opportunity cost. Let's start with a real apples to apples comparison of a 3 year lease vs 3 year purchase and sell, factoring in opportunity cost. I'll assume you sell the car for the residual value.

Leasing - after 3 years, total cost = $32,817.60
(including the return of your SDs). You own nothing at the end of the lease, so that's your cost. However with the SD, you actually have $39,117.60 tied up for the lease, which I'll use for opportunity cost calcs.

Financing (5 year loan scenario) - after 3 years, total cash outlay = $52,296.17. You still owe $29,651,19, and the Residiual value of the vehicle is $46,919. After the sale, you net $17,267,31 in cash, bringing your NET cash outlay to $35,028.86. So in this case, including taxes(!) you have spent $2200 more to finance the vehicle than to lease it. You have also tied up an average of $6600 more cash over those three years and need to add back between $200 and $1700 in lost returns (1% - 8%). So cost is $2400 - $3900 more. I calculated $6600 as the total additional cash outlay divided by 2, because that cash outlay starts as equal, and grows to the final amount, evenly over the 3 years. It's an approximation.

Financing (3 year loan scenario) - after 3 years, total cash outlay = $79,499.6. You owe nothing, and the Residiual value of the vehicle is $46,919. After the sale, you net that $46,919 in cash, bringing your NET cash outlay to $32,548.1. So in this case, including taxes(!) you have spent $300 less to finance the vehicle than to lease it. However you have tied up an average of $20,200 in cash so you need to add back in between $600 and $5250 in lost returns (1% - 8%). So cost is $300 to $4950 more.

So the act of selling a purchased car after 3 years to make it equivalent to the lease makes it more exensive (mainly due to the taxes you end up paying on the residual) - but roughly equal if you aren't returning much on your investments. If you extend the scenario beyond 3 years, it is assumed you lease a new car vs continuing to finance your existing car, and the cost of financing then obviously quickly drops relative to leasing, as you are paying for depreciation on a new car, vs keeping a much lower rate of depreciation on your existing car. I could run more complex scendarios but I suspect if you add an additional year to the purchased car before selling it, you are in much better shape financing. Of course, you don't get a new car.

So what's the conclusion? If getting a new car every 3 years is really important to you, it's a no brainer - lease it. However, if you think the cost of financing is equal between the two, they really aren't. Finance costs of lease are certainly higher, while true cost depends on your personal "cost of capital". It makes no sense to lease with the intention of buying at the end of the lease, and it makes no sense to buy with the intention of selling after 3 years. Owning becomes cheaper - all costs included, not long after 3 years, although the exact time frame depends on your cost of capital.

If you are willing to deal with a higher payment, and keep a car 4-5 years, you'll save a lot more money long term. Really it comes down to this - let's say you are attracted to that $870 monthly payment, and that's why you lease your car. Every 3 years, it's a new car, and you are paying, in perpetuity, $870 a month. If you commited however to owning for 4-5 years at a time, your payment would be $1240, and you would be paying, in perpetuity, $1240 a month. Yet - becuase of the residual value at the end of the loan you are wealthier if you buy. So while it is counterintuitive, in this scenario, higher payment = savings, if you are willing to accept keeping the car a bit longer than a 3 year lease. And let's say you love the car, and you keep it longer than 5 years - you save even more.

My final conclusion - leasing is really just a form of financial engineering meant to capitalize on a financial heuristic* - a preoccupation with monthly payment. Unless getting a new car every three years is truly important to you, it's better to buy. However, YMMV as there are lots of variables in the above analysis. Other intangible variables include the ease of leasing, not having to deal with paying for maintenance, etc. Lots of variable you could aim to include.

*Heuristics are simple, efficient rules which people often use to form judgments and make decisions. They are mental shortcuts that usually involve focusing on one aspect of a complex problem and ignoring others.

[Deja_Vu]

Yeah I did a comparison of how much I thought I "lost" by buying my Lexus vs leasing it. Turns out by buying it and then selling it a year and a half later was basically the equivalent of leasing it for $486/month with no money down. No dealer would've given me that deal and I ended up on top IMO. It's not always better to lease even if you're getting a new car every couple years.

[greytrack]

Good info here. I lease for a few reasons. 1. Cheaper payment. 2. Always want something new. 3. Always in warranty. I feel like you have more options when lease.

[Whttiger25]

Originally Posted by greytrack

Good info here. I lease for a few reasons. 1. Cheaper payment. 2. Always want something new. 3. Always in warranty. I feel like you have more options when lease.

totally understand that. Just a counterpoint to your point #3 - if you happen to drive 12k miles a year, you could own for 4 years and still have the car under warranty. And you can try factoring in the cost of extended warranty and maintenance plans into the above analysis as well.

[SakhirM4]

I always buy. The car is mine and I can do what I like and I always keep them for at leats four years. With two cars, I can keep them for four years and still have a new one every 2 years. This time however, I have had one of them almost 15 years.

[BwoodBMW]

great analysis and shows exactly why I hate people getting passionate about why they leased or why they purchased and acting like everybody should do the same. There are very clear reasons to go both ways. I keep my cars normally 5-7 years. I always purchase and whatever I sell the old car for gets rolled into a down payment on the new one. I started this with a used e39 5 series and having done this consistently over the years my down payment when I order my next car will be north of $30k (initial cash down payment for the e39 was $10k, I drove that car for 3 years and sold it for $500 less than I bought it for, but there were some maintenance expenses involved) and I've never had a monthly payment greater than $600. this works great for me. I'm happy and feel like it financially makes a lot of sense. Leasing works great for most of my friends. They almost always have newer cars than I do and they don't pay much more a month. To each their own...

[OneRib]

I've done both and what I like about leasing is not having to worry about diminished value if there is an accident and not worrying about selling the car I own. I haven't had much trouble selling or trading cars I have owned, but I also kept them a while and they didn't have much value to fight over.

I like the low risk and easy turnover of a lease even if I pay a little more for the benefit. But this really only applies to BMW. Other manufacturers have poor lease terms and I would never consider it an option.

[justin4u]

One additional detail. The analyses above assumes you can sell the car at the residual. I would argue lots of people simply trade in their current car at the same place they buy their new car. The trade-in value could be 20% less then residual.

[Whttiger25]

Originally Posted by justin4u

One additional detail. The analyses above assumes you can sell the car at the residual. I would argue lots of people simply trade in their current car at the same place they buy their new car. The trade-in value could be 20% less then residual.

Good point - and I supposed for those people leasing would be the better option. But from my perusal of the M3 used market, if you are willing to sell the car yourself it appears BMW residuals are not far off...

And also the add a few points to the +column for leases

- If the car depreciates faster than predicted, you are protected
- It may be worth paying more for effective "gap" coverage and additional depreciation coverage if you total your car or get in an accident.

So it helps to know how much more you are paying for the lease, and if you are getting appropriate value for your goals and peace of mind for that cost.

[igom3]

Originally Posted by greytrack

Good info here. I lease for a few reasons. 1. Cheaper payment. 2. Always want something new. 3. Always in warranty. I feel like you have more options when lease.

+1

[MRCUR]

Fantastic post. Really informative and should be pretty helpful for people who are trying to figure out the true financial implications of financing vs leasing.

[///M-er-gized]

There are other factors as well. Everyone has a unique set of circumstances. I'm putting 2 kids through college. When all is said and done, tuition will cost me around $240,000 (assuming they graduate on time). The monthly payment isn't really an issue for me because I have steady income. However, I really don't want to withdrawal any cash out of any of my accounts because of future tuition payments. Plus, I like a new car every 3 years anyway.

With all that said, leasing make sense to me. I put <10k miles per year on my car. Minimal out-of-pocket expenses. Reasonable monthly payment. I'm getting a new car in 3 years anyway.

[Whttiger25]

Originally Posted by ///M-er-gized

There are other factors as well. Everyone has a unique set of circumstances. I'm putting 2 kids through college. When all is said and done, tuition will cost me around $240,000 (assuming they graduate on time). The monthly payment isn't really an issue for me because I have steady income. However, I really don't want to withdrawal any cash out of any of my accounts because of future tuition payments. Plus, I like a new car every 3 years anyway. With all that said, leasing makes. Minimal out-of-pocket expenses. Reasonable monthly payment. I'm getting a new car in 3 years anyway. With that said, I did pay cash for my wife's car, and both of my kid's cars.

All very reasonable factors that lead to making a lease a better decision for you.

My goal with this post is to dispel the heuristic that the monthly payment determines cost and affordability. I think some people reach for cars they really can't afford because the payment seems attainable, vs thinking longer term about utilizing actual equity in vehicles for a strategy to preserve wealth. Despite the fact that cars only depreciate, that doesn't mean it isn't worth owning them. I think those who lease need to do it for reasons other than being able to afford the payment, including wanting a refresh every three years, convenience of not having to haggle when sellign the car, always being under warranty and free maintenance, and most importantly, being able to afford either leasing or financing. Because if you can afford to lease the car, but that finance payment seems too high, then I dont' think you're in a good place to afford the car.

All too often I see people saying "I make $60k a year but this car is only $650 a month with my lease deal, so I can afford it!" I worry about those people.

[abnorM4l]

There's a pretty good (free app) on iTunes called CF Tools (no affiliation to the developer) that you can run various loan/lease options if one were to look at it based on a mathematical stand point. It breaks down what the monthly payment would be (if that's one option in how someone makes a purchase) and it can also calculate the monthly payment based on the total. I've found it very useful.

[Richy Rich]

I treat my cars as if they are long-term rentals. I've yet to keep one for more than a year and I've never put more than drive off at time of lease signing. It all really depends on ones goals, I suppose.

Lease just keeps my payment lower over the course of my 'rental period'.

I believe I lost ~3k by doing this with my F80, difference between trade in value and residual, had I sold it private I would've came out on top.

[wazzza]

I leased simply because I cannot afford to buy -- not the best financial decision, but I can't argue that M4 is a good financial decision in any circumstance at all. Hopefully by the end of the lease, I will be in a scenario where I will have a family, and 2 cars in the household. That way, owning for 4-5 years becomes a reality, and a new can can come in on a 2-3 year rotating basis between the two. Best of both worlds IMO.

[M4LF]

Originally Posted by Whttiger25

My final conclusion - leasing is really just a form of financial engineering meant to capitalize on a financial heuristic* - a preoccupation with monthly payment. Unless getting a new car every three years is truly important to you, it's better to buy. However, YMMV as there are lots of variables in the above analysis. Other intangible variables include the ease of leasing, not having to deal with paying for maintenance, etc. Lots of variable you could aim to include.

*Heuristics are simple, efficient rules which people often use to form judgments and make decisions. They are mental shortcuts that usually involve focusing on one aspect of a complex problem and ignoring others.

Nice, unbiased, and informative post!

I rarely keep a car more than 4 years for various reasons. If the car is a BMW I would never keep it beyond warranty coverage. Too unreliable and too expensive to fix. If it's a reliable brand I would consider keeping until 100k mi. But beyond that I feel unsafe since I want the latest safety technology in my car.

My current arrangement allows me to deduct my monthly lease payments. So I save about 1/3 of my actual lease payment. The things that I like in purchasing is I'm not tied to this 36 month cycle. I sell or buy whenever I want. I also like the fact that you can do any mods you want. Finally the possibility of decrease ownership cost.

But looking at my current situation, leasing is the only way to go. What do you guys think?

[wazzza]

Originally Posted by Whttiger25

All too often I see people saying "I make $60k a year but this car is only $650 a month with my lease deal, so I can afford it!" I worry about those people.

I did the exact same thing :/ Although my ratio of income to monthly payment is much much better than the above example. I guess this makes sense for most cars that are used as utility to go from A to B. But I think most "sensible" reasoning go out of the window for something like an M3/4.

I drive barely 10 miles a day. Never track. Don't even know how to drive a manual. Just ordered the M4 6MT. This is already hovering realms of insanity, we don't have to reach the leasing because I can afford madness

But like I said, sensible, calculated decisions are made when buying a Toyota Corolla, not an M4. That being said, your points are all excellent and very useful in deciding if one is in the position to do either. For me, leasing was the only option to drive a brand new M4.

[RobbyMack]

buying a car is an emotional decision for most. How you go about financing this happiness is entirely up to the individual. Personally I don't know why anyone would finance (lease or purchase) a car. I pay cash, it's just how I roll

[TTG]

Great analysis and a very good write up. I think as a daily driver, I would prefer lease (my DDs are all leased)

However In my case none works.....

All of my BMWs were EDs and I usually paid 500 to 1000 over ED invoice...cash deal

I keep them for 2-3 years and they have never been my daily drivers......Once I sell them in 2-3 years (all on this forum) and end up getting back what I paid for the car.....minus the taxes.

It has been great so far but it sure isn't for everyone..... And I understand that my money can be earning interest else where.

Thanks for posting this up...... But there is an alternative for those that buy them as garage queens.

[Whttiger25]

Originally Posted by TTG

Great analysis and a very good write up. I think as a daily driver, I would prefer lease (my DDs are all leased)

However In my case none works.....

All of my BMWs were EDs and I usually paid 500 to 1000 over ED invoice...cash deal

I keep them for 2-3 years and they have never been my daily drivers......Once I sell them in 2-3 years (all on this forum) and end up getting back what I paid for the car.....minus the taxes.

It has been great so far but it sure isn't for everyone..... And I understand that my money can be earning interest else where.

Thanks for posting this up...... But there is an alternative for those that buy them as garage queens.

Thanks for that. I think paying cash is a great option as well. You do give up on possible returns elsewhere, but more than anything it is a sign you can truly afford the car.

With rates at say, 0.9%, I find it hard to justify for me. I don't want to touch my investments, and I could afford a $1400 payment on a 36 month loan (my stripper build) fairly easily.

So I think all three options (cash, lease, finance) will be the right option for the right individual. I just hope that those who are borderline able to really afford it all understand the math and understand it isn't only about the monthly payment.

[Whttiger25]

Originally Posted by utsavized

I did the exact same thing :/ Although my ratio of income to monthly payment is much much better than the above example. I guess this makes sense for most cars that are used as utility to go from A to B. But I think most "sensible" reasoning go out of the window for something like an M3/4.

I drive barely 10 miles a day. Never track. Don't even know how to drive a manual. Just ordered the M4 6MT. This is already hovering realms of insanity, we don't have to reach the leasing because I can afford madness

But like I said, sensible, calculated decisions are made when buying a Toyota Corolla, not an M4. That being said, your points are all excellent and very useful in deciding if one is in the position to do either. For me, leasing was the only option to drive a brand new M4.

I'm with you man! Personally with an income of $200k I'm borderline able to afford this car. Conservative financial advice gurus will say you need to make $500k to buy this car - and I get their point and agree with them from a very very long term perspective, but cars are very emotional purchases for us all.

The beauty of the M3 is that it actually can be a daily driver. It's got tons of power but can also behave nicely, and fit a child seat in the back. I'm planning on buying mine to own longer than any car I've had before...so 7 years?

At first I thought about leasing to buy...start with the low payment and then as long as everything is going well buy it out. So I did this analysis and realized that was silly - either buy it, or lease it. Planning to buy out the lease is just throwing money away