Are you in the market for a new car?
One thing to consider is whether you should buy or lease. Let’s say you’ve decided on a car. You’ve picked out the make and model, and added all the necessary bells and whistles. Before you make it to the finance person’s office, you should know whether you’re going to lease or buy.
Let’s do the math: Financing a Purchase
A 2014 Honda Civic costs $18,700.
You put $1999 down, financing the rest. You also pay $500 for taxes and titling at the dealership.
You qualify for 1.9% financing on a three-year loan.
Your total monthly payment is: $478.
At the end of three years, you own the car outright, and have paid a total of $19,207.
Financing a Lease
In this case, the $1999 is due at signing.
Plus you pay $500 for taxes and titling.
You pay $159 per month, for 36 months.
At the end of three years, you either have to pay the residual value in order to buy the car, or, more likely, do the whole process over again, and you have paid a total of $8,223.
Which is Better?
If you think about it only over the course of three years, your best bet is to lease. But it all depends on what you want. If you want to make payments for three years, and end up owning the car, you should finance it. If $478 sounds too high, you could consider extending the loan (although you’ll probably have to pay more in interest), but if you’re thinking in terms of monthly payment, you’re playing their game.
If you want something that you don’t ever have to buy new tires for, or spend money on car maintenance outside of gas fill-ups and oil changes, maybe leasing is for you.
What About the Long Term?
But let’s take the math one step further and assume that you’ll trade your lease back in for a similar car and repeat the cycle.
Hondas are known for their reliability, so let’s see how things look after four cycles of leasing, or 12 years.
In the first scenario, you still have the same car, and you’ve spend nine of the last 12 years without a car payment.
In the second, you’ve had a car payment (albeit a small one) consistently for the last 12 years.
If you financed, you still would have spent $19,207, plus, let’s call it $2500 in maintenance over the years, which is $21,707. The car is worth around $2500 (provided you didn’t put it into a ditch). So let’s say you sold it, making your total investment over 12 years $19,207.
If you leased, and the terms remained the same, you would have spent $32,892, and you wouldn’t get to sell your car ever because you don’t own it.
The difference between leasing and owning, then, on a purely financial basis, is $13,685 over the course of the life of this Civic.
Which works out to $1140 per year, or $95 a month.
Is it worth it to you?
For me, it’s not. I drive maybe ten miles a week, I don’t care about cars, and I absolutely love not having a car payment. But I know I’m in the minority, and I wanted to go through this math experiment to see whether you could determine the right option financially. Just remember, leasing is a lifestyle choice, not a financial choice.
It’s the latte factor, basically.
Image by dantada