Leasing vs. Buying a Car: Financial Considerations

Introduction

• The decision between leasing and buying a car is common and can be controversial.
• Important to compare the total cost of car ownership per year.
• Intangible factors to consider:
  • Depreciation
  • Maintenance plans
  • Feeling of ownership

Current Car Cost Trends

• Auto loan interest rates are higher than ever.
• Average monthly car payment for a new car in the U.S. is ~$729.

Leasing a Car

• Leasing is essentially renting a car for a set period (usually 3 years).
• At the end of a lease, the car is returned to the dealership.
• Monthly payments cover:
  1. Depreciation: Loss in car value over the lease term.
  2. Interest/Finance charge: Cost of "borrowing" the car's value.
  3. Taxes: Associated with the lease.
  4. Fees: Related to the lease.
• Typically cheaper monthly payments than buying.

Example: Toyota RAV4 Hybrid

• Leasing Details:
  • MSRP: $31,385
  • Down payment: $3,000
  • Lease term: 3 years
  • Monthly payment: $394
  • Residual value: 67% of initial value ($20,088)
  • Total cost: $17,118 over 3 years
  • Option to purchase: $20,088

Buying a Car

• Involves a down payment and financing the remainder over a term (commonly 5-6 years).
• Payments include principal and interest.
• Interest rates vary by economic conditions and credit score.

Example: Toyota RAV4 Hybrid

• Buying Details:
  • MSRP: $31,475
  • Down payment: $3,000
  • Loan term: 5 years
  • Interest rate: 6%
  • Monthly payment: $551
  • Depreciation: 21% over 5 years
  • Resale value: ~$24,885
  • Total cost: $36,250 over 5 years

3-Year Financing

• Monthly payment: $866
• Total cost: $34,176
• Resale value consideration impacts total ownership cost.

Cost Comparison

• Buying vs. leasing over different terms (3 vs. 5 years).
• Buying is generally more economical over long ownership periods.
• Leasing allows frequent new car changes and lower initial payments.

Factors to Consider

• Buying is better for:
  1. Long-term ownership
  2. Pride in ownership
  3. No mileage restrictions
• Leasing is better for:
  1. Frequent new car preference
  2. Limited driving
  3. Business-related write-offs

Conclusion

• Generally, buying is more financially prudent over long terms.
• Leasing benefits those who prefer new cars frequently, have low mileage needs, or business considerations.
• Individual circumstances vary; it's crucial to run personal calculations.

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Note: These considerations should be tailored to personal financial situations, market conditions, and individual preferences.