Why Leasing Seems Deceptively Cheaper
This week, a friend of mine mentioned that he knew someone who had just picked up a new Porsche 911. He said that he had leased it, and gotten a great deal – only $750 per month. He has an allowance of $700 per month for his car as a benefit of his job, so he said that “it’s only $50 out of pocket per month.” That number seems very low, so since he leased new I’m going to assume he put a huge amount of money down.
I hear this all the time. People claim that leasing is a cheaper way to drive newer cars every few years without worrying about the depreciation. Do they think that car dealers are stupid enough to give away money by taking a car back for less than it’s worth without making them pay for it?
Let’s do a comparison of three scenarios: buying new, leasing new and buying slightly used (1 year old). We’ll use the BMW 335 convertible as an example.
As you can see, the lease is not any cheaper because even though you have smaller monthly payments, you don’t actually own the car at the end of the lease and thus you cannot sell it. I assumed that the cars were identical, driven 12,000 miles per year, with a 5% annual interest rate. The depreciation data came from Edmunds’ True Cost to Own tool, and I assumed that there were no operating or repair costs since the car comes with a 4 year, 50,000 mile warranty and maintenance plan which is fully transferable. The lease is a special promotion going on right now, and is actually limited to 10,000 miles per year, but I decided to at least give leasing a fighting chance.
It may be true that a lease will insulate you somewhat against unforeseen depreciation, such as a gas-guzzling Cadillac Escalade with a lease ending in 2008, amid record high gas prices and a recession, both of which severely reduced the demand for big trucks and thus caused abnormally high depreciation. However, these cases are rare and, while I haven’t run the numbers, I would wager that it still would have been much cheaper to buy a slightly used car.
No matter how you slice it, car dealerships know how to make money and they wouldn’t push the lease option unless it were making them as much or more money. According to BMW, more than half of their customers choose to lease. Just as you should negotiate over total cost instead of monthly payments, you should look at the total cost of a lease rather than just the monthly payments relative to a purchase.
Now that we know that leasing is just about as expensive as buying new, if not more, keep in mind that there are all kinds of restrictions on a lease as well – they can ding you for going over your annual mileage, and anything they deem is “excess wear and tear.” If you decide you don’t like the car, you are often out of luck with a lease as well – you are committed to paying for the full lease, even if you change your mind after a month or so. (For more information on lease contracts, see the Lease Guide website).
No, thanks. I’d rather own the car and be able to do what I want with it.
To get more in-depth information on how to save thousands while driving newer cars, check out my e-book here.
Great Blog post. I am going to bookmark and read more often. I love the Blog template … if you need any assistance customizing it let me know!
Good post,
It would be more useful if you created fields to change the interest rate as well as adjusting the down payment to change the monthly payments and total cost.
Very nice analysis, however, you have failed to highlight the fact that your ‘resale’ prices listed for either the new or used purchased cars depend upon the owner being responsible for and capable of selling the car in a retail manner for full retail price… this is typically unlikely, and potentially impossible in today’s market. A better analysis would show a trade-in scenario, or outright sale price at something closer to wholesale value. Again, your suggestions are very sound, but the savings are realistically about half of what you suggest, and potentially even less depending upon the vehicle. Leasing IS more expensive, but not nearly as much as you suggest.
@Ruben
The reason I included the spreadsheet was really to show the calculations and illustrate this example. It can also be downloaded if you would like to adapt it to run different scenarios.
@Keith
Thanks. I understand what you mean about the trade-in vs. retail numbers. To get the resale values I used, I went to Edmunds’ True Cost to Own tool, looked up the car in question, and summed up their depreciation numbers over 3 years. For the new car, the total depreciation was $22,514. For the 1 year old car, the depreciation over 3 years was $12,641.
Your comment did lead me to look at the resale price that I arrived at more closely, and I agree that it was high, because in the cases of the purchases I was only taking the depreciation into account as a cost and neglecting the taxes, interest, etc. When I made this correction, the cost per mile of the new purchase jumped from $0.63 to $0.76 and the used car purchase jumped from $0.35 to $0.39 per mile. Thanks for pointing that out.
My point is that whether you buy or lease a new car every few years, you would be much better off by doing something as small as looking at 1 year old cars instead. This is especially the case in expensive luxury cars like BMWs, which have depreciation which is steeper than most cars in the first year ($14,090 in this case, per Edmunds) because the demand for such cars on the used market is lower.
Leasing seems like an attractive option because the payments are lower, but in reality you are still going to pay for the big first year depreciation hit. I saw this often at the Mercedes dealership where I worked – salespeople would offer a lease if a customer said they wanted lower payments. I just wanted to show that this is very deceptive, and when someone is making a decision like this, he or she must take the total cost into account instead of just looking at the payments.