By Skyline On Wednesday, June 07 th, 2017 · In

FIELD NOTE: JUNE 2017

"LEASE FOR LESS?" UNLIKELY.

If you are shopping for a new car, leasing can seem like a cost-effective alternative to buying. Yet, while leasing may have short-term advantages, in the long run, buying a car is almost always less expensive.

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What’s the appeal of leasing? First off, leasing generally requires a lower monthly payment than a car loan. For example, a $21,000 car loan at 2.79% interest for 60 months will cost about $375 per month. In contrast, a three-year lease payment for the same vehicle could cost as little as $180 per month.¹ In a lease, the dealership also assumes the risk for depreciation, so you don’t have to worry about the car’s trade-in value.

Although leasing has its benefits, the hidden fees can be costly. For instance, leasing contracts include about $1,000 in acquisition and disposition fees. Dealerships can also charge exorbitant penalties for extra mileage and “excess wear and tear.” Additionally, dealerships often sell leaseholders marked-up maintenance programs that far exceed the average cost of a new vehicle’s upkeep.²  

The biggest downside to leasing however, is that once your lease ends, you don’t own the vehicle. Yet, when you take out a loan to buy a car, after you pay off the loan, you own the car. Although the car’s value will have depreciated, you can trade in the car or sell it to a private party, reducing the cost of ownership for your next vehicle purchase.

The next time you walk into a dealer’s showroom, remember that leasing may cost you less initially, but over a span of 40 years, buying could save you well over the cost of a new car.³

Source: Kelley Blue Book

¹ Assume 3-year depreciation to $13,000 and a down payment of $2,500 ($8,000 depreciation minus $2,500 down payment divided by 36 months = $180.)

² The total cost of leasing and maintenance programs vary significantly based on location and terms of the leasing and maintenance contracts. Our estimates are based on averages for the Portland, OR metro area.

³ If a vehicle is used for business purposes, there can be tax advantages to leasing, but these exceptions fall beyond the scope of this article.

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