Shopping for a New Car – To Lease or To Buy?
The Financialist • Issue 133 • April 2017
BY KELSEY PENTY HBSc CFP
You’ve made the decision to purchase a new vehicle, and now you must ask yourself – should I lease or should I buy? This is a question that we come across time and again with our clients.
In making this decision, there are several things to consider and the right choice for you will depend on many different factors.
First and foremost, there is the question of monthly cash flow potential. If you don’t have the funds available to buy the vehicle outright, you will need to finance your purchase by taking out a loan and making monthly payments against that loan until it has been repaid.
When leasing, you will also be making ongoing monthly payments, for the full term of the lease. Monthly lease payments, however, are often significantly lower compared to loan payments. This is because, when leasing a car, you are paying for the amount the car will depreciate during those years of use, not the full cost of the car.
Another consideration to take into account is your intention with the vehicle, and how hard you expect you will be on it. Lease agreements often have a maximum annual mileage allowance written into the contract. Therefore, if you intend to drive a lot, you run the risk of going over this limit and being charged a penalty for doing so. Leases also have wear-and-tear fees, so if you are prone to scratches or damages, a lease may not be the best option for you.
One clear advantage of buying your car is that it represents an asset you own, and therefore, becomes part of your net worth. Cars, however, are considered depreciating assets, and begin to lose value from the second they are driven off the dealership’s lot. Asset value is something to consider when making any major purchase and a car will likely be your largest asset after your home.
Now, let’s consider the math.
An article published in The Globe & Mail ("Lease or buy a car: What's the better option?", 2011) gave the following example, which provides a comprehensive comparison of the potential cost differential in leasing versus buying the same car, over a 10-year time period (in pretax dollars).
Assume the list price of the vehicle is $34,000.
OPTION #1 - LEASE
Lease details: 36 months, 24,000 km annual allowance, $0 down offered at 1.9-per-cent financing and some incentives.
Lease Payment: about $520 a month for 10 years, assuming continual roll over to new car at term expiry.
Total financing cost over 10 years: $62,400
OPTION #2 – BUY
Loan financing details: 60 months, $0 down, offered at 0-percent financing, miscellaneous incentives.
Loan payment: about $600/month for five years
Total financing cost: $36,000
Other Associated Costs: Timing belt, water pump, tensioner in fifth year: $1,500. Replace brake rotors and pads every three years: $1,000 x 3 = $3,000. Miscellaneous parts and labour over 10 years: $10,000.
Total financing, maintenance and repairs: $50,500
Potential savings in this example: $11,900 plus the value of owned car at 10 years.
As you can see from the numbers, buying a car is your best option, based on the amount of money saved overall. And while leasing costs less up front, buying tends to be cheaper in the long run. Furthermore, the longer you own your car, the more you save overall by buying it.
However, if upgrading every few years is important to you, a lease may be the way to go. Most leases last around 36 months, so you have the ability to trade up at the end of each lease.
In summary, there are both advantages and disadvantages of buying versus leasing, and there are arguments to be made for each option. Before making your choice to lease or own, consider your options and the purpose of the vehicle, as these factors will greatly influence the best decision for you.