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The Expert Podcast brings you firsthand narratives from experts across diverse industries, including private investigators, general contractors and builders, insurance agencies, vehicle specialists, lawyers, and many others.
So, is leasing a vehicle always a worse deal than buying? A lot of times you'll see common financial advice that says never lease a car—it's a bad financial decision. But let's take a look at how leasing compares with financing and what some of the advantages are.
We took, for example, a $50,000 car in this calculation. You might think that's a lot of money, but right now, the average price for a new car is just shy of $50,000. So as a round number, we use that. We have two columns here: a buy column and a lease column. We calculated both of these with no money down so it's equal, and also we did not calculate sales tax to keep it apples to apples. Plus, if you want to put money down toward either option, you could just pay your tax or your registration.
On a buy, right now interest rates for new cars average roughly 8.5% for a 5-year loan. That would give you a payment of $1,025.55, so $1,025 times 5 years, which is 60 months, gives you a total out-of-pocket cost of $61,500 for that car, including the interest.
If you lease the same car, they don’t use an interest rate; they use what’s called a money factor. We plugged in .00385. What does that mean? It roughly equals about the same 8% interest rate. It's a little bit less, but we’ll talk about that in a minute. For the lease, this is a three-year term. The monthly payment is about the same—just over $1,000—so it’s not even $20 less. However, at the end of that lease term, you don’t own the car. You have what's called a residual value of $24,000.
What that means is you could just walk away from the car, turn in the keys, and be done. But you paid all that money—$11,000 for three years. However, if you want to own the car, you can pay that residual value of $24,000, and now you own the car. So you don’t have to walk away from the car; you can keep it if you want by paying the residual. You can also finance it. If you think about it, after three years, if you wanted to go the same term as five years, that's only a two-year difference. So if you take $24,000 and divide it by two years, which is 24 months, paying $11,000 a month for two more years would mean you own the car.
That would give you a total payout of $60,000 for that car, which is roughly the same as financing. Don’t focus on the fact that this is slightly less—most cases show that lease and finance payments end up about the same when you calculate them side by side. So, you might say, "Why bother leasing?" Here’s why: at the end of three years, you have an out—you have an option. If you want to walk away from your car, you can.
On a finance plan, you can’t. After three years, you still have two years of payments left. What if that vehicle isn’t worth $24,000 at the end of three years? Right now, that’s about half the value. Do you think a $50,000 car is going to be worth more than half of its value three years later? Because if it is, and you bought the car, you’re in good shape since it’s worth more than what you owe. However, in most cases, the vehicle is going to be worth less than what you owe. So, in three years, if you decide you want a new car, you might owe $26,000 on that car, and it might only be worth $23,000. You’d be $3,000 out of equity.
On a lease, you could walk away. And you might say, "What if it’s worth more?" You can still take advantage of that. If you get to the end of your lease and the car is worth $26,000 while your residual value is $24,000, you can buy it for $24,000 and sell it for $26,000, pocketing the $2,000 difference. You’re not obligated to; you have the option. Leasing offers flexibility and an "out."
Sometimes it doesn’t make sense financially to lease, depending on how the numbers add up. When you total the finance payments and compare them with the lease payments, including the residual value, sometimes the lease ends up costing less. I've seen cases where leasing costs three or four thousand dollars less than financing. If that’s the case, leasing might make sense—you can always buy the car if you want, or even pay cash for it at any point.
Another benefit of leasing is that many times, manufacturers and dealers include discounts in leases that they don’t offer for a purchase. Here’s why: if you buy a car for $50,000, and the manufacturer or dealership wants to put a big discount on it, they might not advertise a $7,000 rebate because it could cheapen the car’s image. That’s why you don’t see big rebate ads on TV anymore. When rebates are prominently advertised, they can make a car seem less desirable. People don’t want to buy a bargain-basement, “blue light special” car; they want one that’s in demand and prestigious.
So, to keep the car's image intact, manufacturers often put these discounts into the lease. For example, they might offer a high residual value or lower interest rates to make the lease payment lower without making the car look cheap. Many times, discounts of thousands of dollars are baked into the lease terms, allowing manufacturers to offer low payments without diminishing the car's image.
Even if you're planning to pay cash or finance, it’s worth asking for the lease payment breakdown. Make sure you get the residual value because it’s an important part of the calculation. Add up the lease payments, including the residual, and see how that total compares to financing or paying cash. Consider the benefit of having a walk-away option after three years if that’s valuable to you.
Because if the numbers are similar or close, having the walk-away option provides financial peace, especially if you want to avoid being locked into a car with negative equity after three years if your needs change. Leasing is not always the best option, but it's worth knowing about. Don't rule it out just because you've heard leasing is “always bad.”
Compare the numbers, be a smart and educated consumer, and do your due diligence. Make sure you don’t make a decision impulsively at the dealership. Calculate the numbers, review them, and think it over. Let it sink in so that you don’t end up with a bad deal. Just compare everything side by side to make sure all the comparisons are equal: same down payment, same vehicle, all details the same. That way, you don’t get switched from one process to another that could cost you money.