Is Leasing Really Fleecing Part 5: The Cost of Leasing vs. Owning

On Behalf of | Sep 7, 2015 | Leasing

Thumbnail image for Car and Money.jpg This is the fifth of nine articles in our Blog Series Is Leasing Really Fleecing?

In most cases, leasing costs more than buying a car. As we explained in our first article, a consumer does not own a leased vehicle but instead pays for the right to use it. Although monthly payments may be smaller, a consumer who always leases a vehicle will always have a car payment. By contrast, a consumer who hangs onto a car after payments are finished can drive for “free” for years.

For example, Hyundai currently has promotions to either lease or buy a 2015 Sonata with a base MSRP of $21,500. One can lease it for $1,999 down and $179/month for 36 months. Or, one can purchase it at 0% financing over 75 months plus a $750 rebate. If someone leasing were to turn their car in and take the same deal again (assuming no inflation), the cost to drive for 72 months would be $16,886.

Someone buying the car would pay a little more – about $20,750. But, they would still have their car and, after the six years, they are driving for free. Or, if the buyer wanted a newer car, the old car could be sold or used as a trade-in to offset the cost of the new car. The trade-in value of the Hyundai would be about $5,000 if driven average miles and if it is in good condition. Deducting that amount from the cost of ownership brings the cost down to less than $16,000.

So, the buyer would save about $1,000 over the lessor if the car is traded in after six years. If the buyer keeps the car longer, then the savings would be even greater.

Of course, the person leasing the car would get a new car every three years, while the buyer is driving an older model. Some might think that is worth the extra $1,000. So, let’s compare costs for a consumer who trades in the Sonata after only 3 years. At that point, the trade-in value would be about $9,500. So, the buyer’s cost of ownership over the three year period would be $11,250 compared to $8,433 for the consumer leasing the car. So, leasing can save money for someone who wants a new car every three years.

But, this scenario involved a heavily promoted vehicle with incentive financing worked into both the lease and the financing. For vehicles that are in higher demand, when interest is being charged, the equation can be quite different. That is because, as we explained in our second article in this series, finance charges are higher on leases. We compared the cost of leasing vs. buying for an Infinity QX50, a popular high-end small  SUV, for a 36 month term. Leasing the vehicle over 3-years would cost $18,648, and purchasing it would cost $38,232 – nearly a $20,000 difference. But, the trade-in value of the vehicle is projected to be about $22,000 after three years – so the purchaser comes out ahead.

The cost of leasing can get much higher when end of lease costs such as over-mileage fees and cosmetic repairs are considered. And, penalties for early termination of a lease can run thousands of dollars. So, even if a lease seems like a cheaper deal, those costs could substantially exceed the cost of buying a vehicle if the car is turned in early or if the mileage is higher than expected. As we mentioned in our last article on games dealerships play in leasing vehicles, these costs are frequently added to the cost of the next lease.

One way to get out of the cycle of continuously leasing cars is to purchase your car from the leasing company. Leases typically provide that the consumer can purchase the vehicle at any time by paying the adjusted capital cost, as reduced over the course of the lease agreement. At the end of the lease, the purchase price would be the vehicle’s residual value.

The best way to purchase a vehicle from the leasing company is to either send a check or, if financing is required, to obtain a car loan directly from a bank or a credit union. When consumers go to the dealership to make the purchase, they may get stuck paying conveyance fees and other costs for services that are not really needed. Some dealerships will even charge the consumer more for the vehicle than the price that it could have been purchased directly from the leasing company.

In our next article, we will discuss some of the pitfalls in leases and explore in greater detail how leasing costs can be unexpectedly higher than the cost of ownership.