Leasing vs. Owning: The Financial Pros & Cons

How much money will you spend buying a new or used car versus leasing it, and what sort of out-of-pocket costs can you expect to encumber during the life cycle of the car?

This is one of the most common questions asked by consumers when weighing the decision to purchase a new or used vehicle or simply lease one. To answer this question is not simple, but not impossible either.

In an effort to make this as detailed a guide as possible, we have decided to just stick with one model of a car, and compare three scenarios. The car we are covering is a 2015 Honda Accord EX sedan that retails for about $24,985, an aggregate average price that was factored based upon the geo market value nationwide.

•Buying New: In a buying scenario, we went with a standard five-year loan with a 20% down payment (about $5,000). With a generous interest rate of just 2.99%, the monthly payment would be $396.

•Buying Used: For our used car model, we went with the 2010 Accord EX sedan, which retails for about $17,000. The term loan is four years with a 10% down payment ($1,700) and an attached interest rate of just 3.5%. The monthly payment for this used vehicle is $370.

•Leasing: As of this article, there is a special leasing offer, with no drive-off fees that are listed and a feasible $339 per month payment. This figure includes state tax (California), but does not include registration fees.

Total Out-of-Pocket Costs

The out-of-pocket expenses from leasing factored to be $4,372 over the course of the term. If purchased new or used, there is equity that can be earned, which can later be cashed-out when buying another vehicle or when selling the car. Buying the car used is the cheapest option, being over $4,000 of out-of-pocket costs, as compared to leasing, and over $9,000 less as compared to buying the car new.

•Leasing cost - $24,161

•New cost - $28,757

•Used cost - $19,566

The thing about leasing is that you do not own the car at the end of the lease term. Whereas for consumers who have purchased the car new or used, they will own the car and benefit from its accrued value. Those who bought this car new would have about $11,000 in equity, and those who bought it used would have earned about $5,000 in equity at the end of the loan term.

Under this thesis, a person who leased this Accord would have shelled out over $6,000 more than the person who bought the car used. In addition, a person who purchased this vehicle new or used would be able to keep the car after the balance had been paid off, while the lessee would have to resign a new leasing agreement with no equity benefit.

Basic Maintenance Costs

One benefit that leasing a car offers, typically, is that you won’t have to encumber the cost of expensive repairs later on down the road. Some leases even include built-in basic maintenance; however this example lease does not. The average cost of maintenance on this vehicle over the first five years of ownership is about $1,000 (oil changes, tire rotations, brakes, etc.).

Now it might make you think that leasing saves you some money from maintenance, but the insurance premiums tend to be higher on leases because the liability is greater, thus eradicating any realized savings from decreased maintenance costs. Insurance on a leased Accord costs about $150 more per year, making the savings basically the same from both spectrums when all is said and done.

Advantages of Leasing

One advantage of leasing is the built-in option to purchase the car at the end of the term. At the start of the lease a purchase price is determined. This price protects the buyer from depreciation in excess and loss of value due to market conditions. In rare instances, this can be turned into equity that the lessee can use to their advantage. If you are using the leased car for business, another advantage is that it can be used as an effortless tax write-off.

•Leasing gets you into a new car more often, letting you take advantage of the latest technology and features.

•Leasing is termed in three-year contracts, so your car is always covered by the manufacturer’s warranty.

•Many leases have a break-clause that allows you to cancel the contract for a predetermined fee.

•You have a built-in price from the start of the lease should you want to buy the car.

•Leasing for business is tax deductible.

Benefits of Ownership

Owning a car is part of the American dream, and is as colloquial as the white picket fence out in front of your home. There’s also a different feeling that’s exuded when someone says they own a car versus just leasing it and paying to use it. Aside from these internal emotions, however, owning a car also has a number of innate benefits attached to it.

•The car can be modified and updated as you see fit because you will not be confined to the binding agreements of lease, which prohibit you from making modifications to the vehicle.

•Wear and tear will still occur, but is factored into the cost of ownership, and you will still be able to sell the car whenever you please without waiting for a lease contract to expire just to get a new car.

•You will benefit from earned equity, which gives you a lot more leverage when getting a new car, as contrasted against leveraged depreciation protection from a conventional lease.

•There is no penalty on excessive mileage with ownership. Whereas with leasing, you generally are limited to 10,000-12,000 miles per year, with a fee for each mile that you add on after the limit.

In the end, it’s an ongoing debate: to lease or to buy. If you are looking for a long term vehicle that you can rely on for years to come, and you want the benefit of the earned equity and ownership with fewer restrictions, then buying is the best option. However, if you like having a new car every three years and the peace-of-mind of a good warranty with the option to buy, leasing may make more sense.

In the end, the choice is yours to make.

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