Lease vs Buy

Lease vs Buy

Many of us lease our cars. Leasing is better for most people, but not everyone. (Full disclosure: all things being equal, we would rather see a customer lease because owner loyalty is higher---lease customers pay less to drive a nicer, safer car that's under warranty, and their satisfaction is higher. The margins in auto retail are thin so we've built our business on the volume of repeat and referral business from happy lease customers.)

Examples of People Who Shouldn't Lease

  • If you plan to turn your car into a street racer, don't lease, because the leasing company will not like your coffee can exhaust pipe and the huge wing that you bolted on the trunk.

  • If you buy your cars and keep them forever, don't lease. You have discovered the most economically advantageous way to buy a car. (Editorial aside: while this can be a good financial decision, it's not a very good decision in terms of your safety because you're going to be spending a lot of time in a car that's obsolete in terms of safety technology. But it's up to you to weigh the cost/safety scales).

Leasing Benefits for Everybody Else:

  • A lower monthly payment

  • A safer, more reliable car all the time, and not just when the car is new

  • A car protected by warranty with fewer repair bills

  • Investing cash elsewhere instead of tying it up in a depreciating asset

  • Owing nothing at lease end with the option to buy your car at a wholesale price

  • Excess miles are cheap to buy on a lease (10 cents per mile up front) compared to the depreciation on your financed car (more like 25 cents per mile).

  • Gap insurance is free from Subaru. If a leased car is totaled in a theft or accident, there's no risk of owing the bank more than the insurance proceeds.

  • Great way to put an end to being upside down in the loan. Instead of rolling negative equity over into a new loan, nothing is owed at lease end.

Why don't even more people lease?

The biggest objection most folks have to leasing is that they don't understand it. People tend to fear and avoid things they don't understand, especially when they are in an uncomfortable environment (such as a typical showroom). Here's a quick contrast example between financing and leasing a $20,000 Subaru for a 60-month loan and a 36-month lease:

Loan                                                                      Lease

$20,000 \                                                                  $20,000                \       

|                \ Bank collects all $20,000                      |                                   \ Bank collects $8,000   

|                  \ from you over 60 months,                   $12,000 (residual)     \ from you over 36 months, 

|                  / plus interest.                                        |                                     /  plus interest.                    

|                /                                                               |                                   /

$0           /                                                                 $0                         /


Monthly payment:  $420                                          Monthly payment: $300

When you get a $20,000 loan, the bank pays us $20,000 for your car and keeps your title until you pay off the entire $20,000, plus interest. When you lease, the bank also pays us $20,000, and keeps the title. What's the difference? With a loan, the bank wants back 100% of the $20,000, plus interest. With a lease, the bank only wants you to pay back the difference between $20,000 and the residual of $12,000. The residual is a forecast of the value of your car after the lease term, and the bank stands behind that forecast.

Common Misconceptions about Leasing

  • "With a lease, I don't own anything." When you take out a loan, do you get the title? Not until you pay off the whole amount. So you don't really "own" it till it's paid off. A lease is the same way. The bank retains the title and if you want to own the car you just pay off the lease.

  • "With a loan, I own the car at the end." True. But not much of a car...a five year old car with higher miles. If the lease saves you $120 a month for the term of a 60 month loan, that's $7,200 that you have in your pocket instead of your car. (And that's assuming you didn't make some additional interest on it by investing it or putting it in the bank.)

  • "It's better to own than rent." The reason you should buy a house instead of rent is because the house usually appreciates. But cars depreciate. And they have significant costs. Most people who lease never pay for brakes or tires, for examples, because they don't keep the car long enough to wear them out. If you finance your car for five years, you'll almost certainly need tires and brakes at lease once, plus other repairs.

  • "I can't trade the car in before lease end." Actually, you can. After driving your car for 30 months, don't you think it's less expensive to get out of a 36 month lease that's almost up rather than a 60 month loan that's only half paid? Approximately 40% of people owe more on their loans than their cars are worth---not only do they not have equity, they are actually "upside down."

  • "I don't want a new car every few years. I like to buy new, pay the car off, and then have the car without a payment." While you may not have a payment in those out years, there are still costs. You'll be spending more in repairs to keep an older car on the road, older cars use more gas and pollute the environment more, have fewer safety features than modern cars, and are more likely to break down and leave you in a dangerous situation.

  • "I drive too many miles." Cars depreciate about 25 cents per mile. Yet with a lease, you can buy additional miles upfront for only 10 cents. At the end, if you go over, they're only 15 cents. People who put a lot of miles on financed cars usually end up owing more than they are worth---not only do you not own your car, it owns you!

  • "I had a bad experience with a lease because I drove over the miles and I had to write a big check at the end." If you had financed the car instead, don't you think that piling on extra miles would have substantially reduced the value of the car at trade in time? Cars depreciate about 25 cents per mile but they only cost 15 cents on a lease if you go over. If you buy them up front, they're only 10 cents! So if you're concerned about driving a lot of miles, we'll build them into the lease for you. Either way, you're better off putting too many miles on somebody else's car!

  • "I had a bad experience with a lease because I had to pay for damage at the end." People who trade in financed cars with damage have to pay too---because they get less at trade-in time. You don't get a bill in the mail for it, but you still pay it. Furthermore, our experience with lease returns is that the Subaru inspectors are pretty lenient about minor damage because they want you to get another lease.

For more information about leasing, Contact US!