Buying vs leasing a car

Leasing is for rich people and buying is for people who want to stay rich. Let us examine the differences between buying vs leasing so that you can decide for yourself if buying is better for you or leasing is.

In my opinion, the primary (and perhaps) only advantage leasing offers over buying is the convenience of having a new car every 2-3 years. Still go through the complete post and decide for yourself.

Definitions – Buying vs Leasing

Let us start by defining buying vs leasing:

Everyone knows what buying a car means – it means you own the car, it is yours, you can use it for as long as you like, and sell it whenever you like.

On the other hand, leasing is renting. You do not own the car. The dealer owns the car, he rents it to you for a fixed period of time (usually anywhere from 2 to 4 years). You pay rent every month. At the end of the lease term, you return the car to the dealer.

Arguments people make

Many a times people say ‘Leasing makes sense for me because this way I can get a brand new car every two years’ – oh well, who is stopping you from selling your car after 2 years and buying a new one? I agree that selling a car will take some effort, and therefore the primary advantage of leasing a car vs buying is the convenience with which you can get a new car. You just go in, return this car, sign paper work, get the new car, and drive off.

They say ‘Leasing is the right thing to do for me because I cannot afford the monthly payments if I buy the car’ – then my friend, you are trying to live beyond your means. You should perhaps consider buying a smaller cheaper car OR still better consider buying a pre-owned car. Ask anyone who has owned a car, the only big difference between a brand new car and a car that has been used for a year is the ‘new factory packaging smell’ – the new smell that lasts for may be a month or so.

They say ‘Leasing is cheaper because the monthly payments are lower’ – Monthly payments are lower but you are not building equity in the car, you can lease the first car for 2 years, second car for 2 years, and third car for 2 years – and still own nothing; while if you buy a car and make monthly payments, the car will be yours in 5 – 7 years time and then you will not have monthly payments.

The above analysis is based on hundreds of buying and leasing options I have seen. Leasing invariably turns out to be more expensive. Remember – the dealer wants you to lease because they make more money on leasing. When you return this car after your least term, they will sell it to someone else and make a profit. They will also make money because you will be doing business with them again, to get a new leased car – while in case of buying, you buy the car and you are done (apart from some periodic maintenance/ servicing needs).

Another disadvantage of leasing is the mileage restriction – if you do not have a very good idea about the miles you will be driving, then you will invariably lose money. Either you will take on a lease with more miles than you need (and pay for it) OR you will end up using more than what you signed up for and pay ‘excess mileage rate’ (which is not cheap).

Leasing allows for regular wear and tear. Anything excessive will cost you money. And yes, a small ding or a scratch is considered excessive wear and tear.  So if you are not a perfect driver or are sometimes just unfortunate, then leasing will prove to be more expensive.

Last disadvantage of leasing I would like to mention today is loss of flexibility. With the lease, you will have to change your car in a very narrow window (the dealership will start to call you a few months before lease expiry with ‘great’ offers and they will usually let you go month-to-month after the lease expires). While with buying, you have complete control over when you are ready for a change.

Still want to lease?

After weighing all the pros and cons of buying vs leasing, if you still think leasing is right for you, then familiarize yourself before you visit a dealer.

MSRP is Manufacturer’s Suggested Retail Price (List/Sticker Price). This is value is used to calculate the Residual Value of the car.

The capitalized cost (cap cost) is the equivalent of the selling price, which you want to get down as low as possible.

The residual value is the estimated worth of the car at the end of your lease. This is the price at which the dealer is taking back the car from you at the end of your lease. When you got the car, it was worth the cap cost, when you returned it it was worth the residual value. So what did you pay for the car to use it for lease term? Cap cost MINUS residual value.

Remember – the higher the residual value, the better it is for you. Usually residual value is calculated as a percentage of the cap cost. I remember a friend of mine having 68% of the cap cost as residual value.

Since you are paying ‘cap cost minus residual value’, your monthly payments are determined by these two numbers, rather by the difference between these two numbers, plus an interest charge  (money factor). Raising the residual value will benefit you; so will lowering the capitalized cost or the money factor.

Money Factor is a decimal number (analogous to the interest rate) that is used to calculate the lease payment. To convert the money factor to interest rate, multiply it by 24. This number may be converted to an approximate interest rate by multiplying by 2400. Example: A money factor of 0.00417 converts to an interest rate of about 10%.

Every salesman (well every smart salesman) will again and again try to make you focus on the monthly payment but remember monthly payments can be very misleading if looked at in isolation. You need to look at the cap cost, residual value, MSRP, upfront down payment, permissible mileage,  excess mileage fee,  money factor, acquisition fee, disposition fee, and an early termination fee.

If you are able to understand all of this, then excellent. If not, here is a simple successful formula. First fix the term you would like the lease for and the mileage. (Tip – never even think of a lease term that exceeds the manufacturer warranty of the car). Typical lease term is 24 – 48 months, and typical mileage packages offered per year are 8,000/ 10,000/ 12,000.

Let us say you need a lease for 3 years / 12,000 miles per year. Next fix a dollar amount that you are willing to pay upfront – it is often zero but amounts up to $3,000 are not uncommon. Let us say you decide to go with zero upfront down payment.

Till now, you have decided that you need a lease for 3 years/ 12,000 miles per year/ zero down payment. (And hopefully you have the exact specifications of the car you need – the make, model, accessories).

Now get a quote from 3 – 5 different dealers in the neighborhood for ‘your car specs’/ 3 years/ 12,000 miles per year/ zero down payment. This way, it is easy to compare their quotes. They might still give you a lot more than you ask for – for example, different scenarios of what happens if you put money down etc, but just ignore all that. Just look at the MSRP and the monthly payment.

The dealer will not always have a vehicle with your exact specs available, so they will send you a quote for an available vehicle that is ‘just more’ than what you need – this will be reflected in the MSRP. Let us say the MSRP of the exact vehicle you need was $18,000 because you did not need an all wheel drive. But if the dealer only has vehicles with all wheel drive, then the MSRP will be $19,000. It is up to you to decide if the additional feature that you are getting is worth the additional cost.

Real life Example

I realized that a real life case study about buying vs leasing car will add a lot of value to this post. So I reached out to one of the largest Lexus dealerships in the country and received the following quotes for buy vs leasing the exact same car.

Buy vs lease - car - pricing - actual example

Buy vs lease – car – pricing – actual example

First thing to note – the dealership tried real hard to get me physically to the dealership. It is a standard sales tactic – most dealers do not want to compete purely on price point, so they will try whatever they can to physically get you to the dealership and then sell the car. After multiple emails back and forth, I finally managed to get this document that shows the exact calculations right from MSRP (Vehicle price) to OTD price (Out The Door).

Second – what this document is still not showing me is the money factor and residual value that the dealer used to calculate the monthly lease payments. I reached out to the dealer again and found out the two numbers: money factor is .0015 and the residual value is 62%.

Now let us understand how the monthly lease payment is calculated: The monthly lease payments consists of 3 costs: depreciation cost, finance cost, and sales tax cost.

Depreciation cost: Simply stated, depreciation cost pays for the loss in value of the car over the period you are going to use it.  Depreciation cost = depreciation over the lease term divided by the number of months in the lease. Total Depreciation = Current value – residual value = $37,282 – 0.62 * $37,282 = $14,167.

Monthly depreciation cost = $$14,167 / 36 = $394.

Finance cost: These are finance charges, you will be using a $37,282 car from the first month itself but will pay only $508 to begin with. Finance costs are calculated using the following formula:

Finance costs = (‘Final car price’ + Residual value) * Money factor. In our case, it is: ($37,282 + 0.62 * $37,282) * .0015 = $ 91.

Sales tax cost: Sales tax cost is simply your total depreciation multiplied by sales tax rate divided by the lease term. So you pay sales tax only for the ‘vehicle’ you will consume during the lease period. In our case, sales tax cost = 6% * ($37,282 + 0.62 * $37,282) / 36 = $24.

Add these three numbers: $394 + $91 + $24 and you arrive at the magical number that the dealer quoted for monthly lease payments $508.

Compare – buying vs leasing

Now we are ready to compare the buy option vs the leasing option for the options that the dealership gave me. $37,282 for outright buy and $508 monthly for 36 mon/ 12k miles lease.

  1. In the leasing option, the dealer is charging you an interest rate (included in financing cost) of approximately 2400 * money factor. So in this example, the dealer is charging 2400 * .0015 = 3.6% interest rateI had told the dealer that my FICO is 805 so assume excellent credit. At my credit, my credit union charges me 1.94% on auto loans.One of the challenges with leasing is – you cannot choose who to finance with, you have to go with the dealer. While you can finance (and/ or re-finance) with any lender you like.
  2. Let us compare this to financing option – $0 down, 1.94% interest rate, loan duration 7 years, the monthly payment comes to $475.What? Really? Yes, really. So per month payments are lower in the buying option vs the leasing option. And at the end of 36 months, you would have built some equity in your car if you buy it using a loan. You will not own it completely because you still have 4 more years of loan payments.To be more scientific, you would own $15,361 in the car. And that too, after you are paying $33 per month less in the buying option vs the leasing option.(Calculations – you pay $475 every month. In the first 36 months, you would have paid a total of $17,100 – $1,740 of it is interest and $15,361 of it will be principal.)

Car purchase is one of the bigger financial decisions that people make (biggest after marriage, education, and house). So please do yourself a favor and follow these 5 simple steps to save a few thousand dollars.

26 thoughts on “Buying vs leasing a car

  1. I fully agree buying is the more sensible option. I have always done that. Further it is better to buy a ‘pre-owned’ car than a brand new one. I did buy a brand new car only once. I am not doing it again. I did it only after having had 3 ‘beaten down’ cars in a row for the prior 5 years, so I wanted to know what it is to have bough a brand new car for myself, but at that point I was quite financially stable and could definetely afford it.

    Bobby, one thing that the real-life example does not make very clear, is the residual value comparision.

    Acording to the dealer, you have “consumed” 38% of the retail value of the car in these 3 years, right? That would be the $14,167 Total Depreciation from above.

    For how much could you sell the car after 3 years?

    • Craig – great inputs (as always).

      I agree that buying a ‘pre-owned’ car is better financially than buying a brand new one.

      I bought a brand new car in 2013 primarily because I selected the car with a very ‘frugal mindset’ – my brand new car cost was a single digit % (less than 10%) of my annual income.

      You also make an interesting point about the ‘resale’ value of the car. I do not have an exact answer for this particular model (the one I asked an invoice for – the real life example in my post) because this is a new model – it came out only this year. But here is a general idea about how much are the car resale values after 3 years:

  2. “At my credit, my credit union charges me 1.94% on auto loans.”

    Does that really apply to a 7-year loan? At my credit union:

    2yr 1.99%
    3yr 2.09%
    4yr 2.19%
    5yr 2.24%
    6yr 2.49%
    7yr 3.74%

    Given those rates on a $37282 loan, I get an extra $30 per month for a 7-year loan [+$2500 in total interest]

    • Eric, I refinanced for 5 years.

      1.94% was for 5 years (and not 7 years). 7 years rate was a whole percent point higher – it was 2.94%.

      (Different credit unions have different rates – for example, in 2013, when I first moved to credit union, I shopped around and found credit unions offering me auto loan rates anywhere from 3.64% – 9.375%. Obviously I went with 3.64%. I had limited credit history at the time.)

      But your credit union rates seem to be competitive to me – They are 2.24% for 5 years. I refinanced in November 2015. Fed had a rate hike of a quarter percent between then and now – so most auto loans are marginally higher today than they were back in November.

      I agree that the difference between 3.74% and 1.94% at $37,282 would be $30/ mo and $2,500 over life of the loan.

      I have no idea about your current income/ liabilities/ stability of income but it is best to best to spend less than 10% of your annual income on buying a car. In no case should you spend more than 20%. (You can potentially consider postponing the car purchase or buying a pre-owned car)

      Also keep in mind that the total cost of ownership (TCO) includes gas + insurance + financing + maintenance + repairs + annual state registration fee.

      • “it is best to best to spend less than 10% of your annual income on buying a car.” This statement may be wise, but it is entirely impractical for people living in the metropolitan area I live in who earn $50,000 or less. There are virtually no dealerships in this area who sell used cars under $5,000. CarMax, touted as a great place to buy a used car, starts out close to $10,000. One can stop by a half dozen used car dealerships and not find a single car under $5,000. And I’m not talking about “close to new.” Even 7-10 year old cars tend to run more than $5,000. For someone earning $35,000, $45,000 or $50,000 who desires to purchase a reliable, used, no-frills vehicle will have an EXTREMELY hard time with this 10% of annual income rule of thumb (which would require respectively a $3,500, $4,500 or $5,000 car).

        Of people I know who have managed to score a used vehicle private party for less than $5,000, most of these cars have come with at least some maintenance / repair needed in the first 12 mo of ownership. I can think of no less than 4 scenarios where people I know purchased a used car within the last year from private parties for the under $6k range and in every case each car required repairs within the first 6 months of ownership. It just is going to happen with a 10-15 year old car.

        I tend to agree with many of the sentiments expressed. However, I wanted to point out that sometimes financially “wise” choices can be out-of-reach for hardworking people who don’t earn high salaries. If I can venture an analogy, I can tell a poor family in a foreign country that they should eat a balanced meal with sufficient protein, carbs, vitamins and minerals but if all they can afford is rice, the “wisdom” isn’t really going to help much.

        To avoid complaining about a problem without attempting anything to fix it, I am considering the feasibility of starting a non-profit organization to provide reliable used cars to lower middle class families based on a sliding scale monthly payment. To do so will require however a steady backdrop of skilled mechanics and donors (likely including rental fleets) willing to donate cars or sell for below market to the non-profit.

        • Dear CRL, I agree with everything you have said.

          My “spend less than 10% annual income on the car” rule of thumb applies only to people who make higher salaries (in the range of $100,000 and upwards). I was responding to someone who was planning to buy a car for $37,282. So I assumed that he/ she isn’t in the $50k per year income.

          Your point well taken – for people who make $35,000 – $50,000 can not afford a car easily for 10% of their salary. And may be sometimes such a car would require lots and lots of maintenance. Though I have known graduate students to buy cars for $2,000 (back in the day) – I think even today they might be buying cars in the $2,500 – $3,000 range.

          In either case, your point is well received. As long as one makes an informed choice and not overspend, he should be good.

    • Hey Craig – you are so right, I meant 7 years. I have corrected it now, Thanks a ton.

      Once again (I know I said it to you a few weeks back too), the calculators you use are very user friendly. Once you get comfortable with Excel, it will be much much easier to do a ‘what if analysis’

      Excel Formula - PMT

  3. I am going to try to do an apples-to-apples comparison.

    From the link of resale values you gave, it is between 57% and 73%. The dealership itself considered 62% for this particular car. Let’s go with this number (62%).

    So, if you buy the car, finance it like you explained for 7 years at 1.94%, then at the 3 year mark sell it for 57% (and cover the loan) you would end up owing about $900 to the bank:
    $21,015 <— Sell car at 62% retail value (62% * $33,895)

    $21,921 <— You owe the bank ($37,282 minus the $15,361 in principal you paid already)
    ( $ 906)

    So, on the surface you are better off leasing.
    In reality there are a number of factors that could actually skew this result (and in some cases by quite a bit):
    – Would there be additional charges from the dealership for 'dings' or more milage?
    – Would you receive $21K for selling the car? What if you are able to sell it for $24K (~71% resale value)? What if you get only $19K? Well, you don’t really have to sell it, you know? With the lease – you must.

    Also, notice in the calculations above we used $33,895 as the 'purchase price', but your loan is for $37,282. The difference is the ~ $2,100 in sales tax + ~ $1,300 in tags/dealership fees. So, you pay 6% in sales tax, but do you get it back on the $21K when you sell the car. The answer is no. So basically the more 'transactions' (i.e. purchases) you make, the higher your 'transaction costs'

    So, just this fact alone should tell you something. Do you really want to be making such a large purchase (with ~ $3,400 ‘transaction costs’) every 3 years?

    IMO, the answer here is unequivocally no. And with a lease you are doing exactly that. You are paying 'transaction costs' every 3 years. This is about 10% overhead to an already expenisve ('big ticket') item. When you purchase the car you are doing that 2x less (if you purchase a new car every 6 years) or 3x less (if you do it every 9 years).

    Resale value over time

    And then, there is the better question. How does resale value change with time? Is it linear? Far from it. The resale value of a car depreciates very rapidly at the beginning and much slower later on.

    If you look at the link with the example resale values, you would see they all drop only with about 10% from the 3 year mark to the 5 year mark.

    So, if you buy the car, but then sell it after year 5 (let’s assume the resale value has dropped by another 12% to 50%):
    $16,946 <— Sell car at 50% retail value (50% * $33,895)

    $11,173 <— You owe the bank *

    So, by driving the car for 2 more years (and obviously continuing to make the monthly payments), your 'equity' in the car went from negative to quite positive.

    Also look how the resale value drops:
    – At year 3 the car value was $21K – a drop of $13K in 3 years or 4.3K per year
    – At year 5 the car value was $17K – a drop of $17K in 5 years or 3.4K per year

    Or to look at it from another angle. The value dropped with $13K in the first 3 years, but then only dropped by $4K more in the 2 years after that. Or it was dropping more than 4K per year for the first 3 years, but then it dropped by 4K for 2 years. This is a 2x decrease.

    And finally, let’s not forget: if you buy, after you are done with repaying the loan, you own something (however little resale value left). With a lease, you own nothing.

    In conclusion:

    I fully agree with Bobby

    1) Buying makes more sense financially.

    2) A good rule of thumb is to not spend for a car more than 10% of your annual income. If it is more than 10%, it is probably more of a 'want' than a 'need'.

    3) There are a lot more expenses around owning a car (the TCO) – insurance, gas, title, repairs, tickets 🙂 A car is not an investment. Far from it. It is pure expense and nothing more than expense. As with all other expenses you should try to minimize it as much as you can.

    Let's also try to look at the capital cost over time

    As with all ‘capital expenditures’, with each passing year, the ‘cost for car purchase’ drops. For example the only brand new car I bought in my life was a VW Jetta. I purchased it “at sticker price” (this is a different story) for $22K (all taxes, fees & finance charges included). I used it (thankfully without much trouble) for 11 years and then sold for $2K.

    So in this case the ‘per year’ cost of the ‘car purchase’ is ~ $1,800 ($20K / 11 years). Had I sold it at year 5, and again assuming 50% resale value, I could have probably sold it for 10K (the original cost was 20K, the other 2K were 'transaction costs'). Assuming I sold it for 10K, the 'per year' cost would have been ~ $2,400 ($12K / 5 years) or about 33% more. This is a significant difference.

    Stupid question, I know, but if these were investment choices (the value appreciated, rather than depreciated), which one would you pick? The one that gives you X return, or the one with 33% more?

    *See the amortization schedule at

  4. I have come to realize that leasing is not as bad as I thought…especially for some! I used to lease a lot of cars when I was younger because it allowed me to drive a nicer car than I could actually afford. This was not smart. So I started buying cars that were a year or two old (let that guy take the depreciation hit). Well it depends what you buy and how long you hold it that determines the value. Three years ago a bought a Certified used Mercedes GL450 for $48,000 that was two years old. I paid cash, so I had no interest costs. We liked the car a lot and don’t even drive a lot of miles. Well I go to check the value and find it has dropped a TON. It is now a 6 year old car with the new year starting and worth about $26,000. So I was losing over $600 a month on depreciation! Add in the $1500 in out of warranty repairs and I could have leased a new one for $700, had a full warranty, the latest features and a new car! And with technology changing so fast a used car is much more “out of date” than they ever used to be. Granted, I am wealthy and my situation is not normal, but I am very conservative with money and when I did the math, I didn’t like it. I would rather pay slightly more (if even that!) and get a new car every three years. Yes, if we had kept that vehicle for three more years or more, the depreciation would slow a lot and it would make more sense…but for who that can afford a luxury SUV would want to drive a 10 year old model? For cheaper cars buying makes sense if you keep them for years, for luxury cars, I think leasing is the way to go for those that can afford it. We now have a new SUV with a residual rate of 60% in three years….this is a huge factor over buying at retail and trading in at wholesale. Could I have sold the vehicle myself for more money? Most likely, but it is not worth it to me to do so. I also own a business, work from home, and can deduct about 70% of that $700 lease payment. I most likely won’t even have to buy tires again….just get a new car…it is a easy choice for me.

    • Brad – thank you for sharing your experiences.

      I see your line of thought. The only point that stands out is “Could I have sold the vehicle myself for more money? Most likely, but it is not worth it to me to do so.”

      Leasing is convenient – I do not think anyone feels other way. After the lease period (and many a times a few months before) you just turn in your car and get back a latest model with just about the same monthly cash outflow. Could buying save you money? Most likely yes, but for some people it is not worth the hassle.

      Now coming to some specifics of your past experiences:

      1. Paying cash for cars is a bad idea IF you handle cash responsibly (which I sure think you do).

      2. I do not understand how you arrived at $600 per month depreciation. The car value dropped to 26k from 48k in 4 years (22,000/ 48 = 458.3). This will change the argument slightly in favor of buying.

      3. I would also be curious to know if $48,000 was a great price to buy the used car you did? In the used car ‘business’ like in real estate, you do not make money when you sell, you make money when you ‘buy’.

      4. Think about it conceptually – what happens when you return a leased car – the dealer will again lease it or sell it, right? So there is a third party customer who will take this car 1-2 months after you have turned it in. Will you not get the best deal if you are able to sell this car to that new buyer directly (and avoid the ‘brokerage fee’ the dealer charges for the transaction)?

      Yes, it might or might not be a good use of your time and energy.

      • Thanks for taking the time to reply! We had the car for three years and three months, so my math is close. In fact, I actually traded it for less than $27,000, so yes, I lost over $600 a month in depreciation. Once 2016 arrived, of course, it became a six year old car.

        I see your point on the paying cash is a bad idea. I actually purchased it on a 1.9% loan but a couple months later just paid it off. Yes, I could have invested that money elsewhere, but I left all of that out of the equation…

        And looking back I think I did overpay a bit for the car because it was a Certified car. My hope was that would help me at trade-in. Not a chance. I am usually a great deal finder and purchaser, however this time I wanted to buy from a Mercedes dealership thinking I would get better service and treatment…that was a mistake too.

        So I agree, IF I would have bought the car cheaper and IF I would have sold the car myself I would have come out better…..but I still put forth that leasing is much better than I used to think. At this point in my life even if I could have saved a $1000 or two on the purchase and if I would have sold it myself for a couple of thousand more, I still would rather lease. And the tax deduction clinches the deal. And selling it yourself is a beating…we all know that. I have another car on Ebay right now. I get $2000 more by selling it myself, but lose the tax deduction of $1600.

        Remember, this was a real world transaction, not numbers in Excel. Unfortunately people do buy too high and sell too low….just like stocks. Which is why everyone’s stock returns are less than what we can theoretically can get. But that is a different post. 🙂
        The biggest negative I found with leasing is that in Texas you have to pay the sales tax on the full amount of the vehicle. So you are out quite a bit every three years. However, I talk to a Lexus dealer here and they tell me they use their tax credits on One Pay leases, so I only pay 1% in sales tax and the money factor comes out to 1/4 of 1%.
        So I am selling my other car and leasing from now on. I just never realize how much the depreciation drops on a luxury car like that. If I had a Honda Odyssey or similar, I think I would have fared much, much better. I think my situation was almost a “worse case”. But for me knowing that I will be spending only XXX for a brand new car with the latest tech and not spend any more on repairs and not have the mess of doing the trade-in or sales game is worth any small increase in cost. I think it will end up cheaper for me over time because I will never keep a car long enough to really get value out of it. It is a cost…a huge one.
        Trust me, it took a lot of thought and math to change me…I was a staunch, Leasing is Fleesing guy!

        Thanks again…nice site.

        • I respond to every message that I receive on this site. I write because you read (If you stop to read and more importantly reflect, I would go back and spend this time earning more money than I already do).

          So you bought a car for 48 and sold it (turned in) for 27k. If you compare this exact same option with the 3 year lease, then you will see why buying is better (leaving the ‘known’ turn-in value and ‘convenience’ part).

          It’s nice that you understand and apply tax shield principles so well.
          A. Tax shield would exist in buying too provided you were financing it
          B. You can use the current Section 179 depreciation if you buy it
          C. More the expense, more is the Tax Shield – so a higher tax shield is usually accompanied with a higher expense

          The repair costs are primarily because the factory warranty usually runs out at 4 years. To compare apples to apples, you would need to compare buy and lease for the ‘same car’.

          You mention that you are doing financially well and 2 – 4k does not make a big difference to you, that is totally understandable. But if you would like to see mathematically – then next time you are in market, ask the dealer to give you a written quote/ invoice both for buying/ leasing EXACTLY the same VIN number, then compare and see which one is better?

          It’s ironical that you mention ‘People buy high and sell low’ and in addition you say ‘that is another post’ – I am writing a new post (this very morning) about asset allocation. It also has a section for risk tolerance. I give a specific example about how buying high and selling low happens.

          Hopefully you have subscribed to my blog using your email ID – so you get an email whenever that post gets published. I usually spend 2 weeks part time writing every post.

          • I can’t compare a lease and a purchase to the same car because the value I will sell it or trade it in the future is unknown on the purchase. In my case, after three years of ownership on a used luxury SUV, it did not come out well….I highly doubt it would come out better if I had bought that car new for $80k.

            Someone in the car industry told me they would never purchase a high end auto and would never have one out of warranty. I may have thought that was a sales pitch years back, but now I see what he meant and leasing solves both those issues. For all the love we give Mercedes and BMW, they are not all that reliable and are more expensive to maintain and repair. I had an extra year warranty, thank goodness, and you can buy extended, but again lease and you can stay in a new car.

            As far the the tax deduction, yes, of course you can write off a purchased car too. And my CPA even said the mileage deduction of .46 is usually better. Until I asked him, What if I only drive 50 miles next month half that being business, what can I deduct? $11.50 Ok, what if in that same month I have a leased car with a $900 payment? Oh, you can write off $450. Winner, winner, chicken dinner. I don’t drive a lot…most is business, the lease allows me to deduct substantially more and drive a really nice car.

            Hey, I am not trying to change your mind. Leasing is not for everyone and sometimes is just the wrong call, but we love to compartmentalize things and make them black or white…its is easier. My post was to point out that in some cases, for some people, leasing can win. Cars are getting very expensive and luxury cars are really almost silly when you think about it. There is no way I am going to throw down $80k+ for a new SUV. I had told myself to never spend more than about $50k on a car. Well, I found out that doesn’t always work out either.
            Depreciation can kill. And tying up anywhere near $85,000 is not fun.
            Remember too, that many times leases are subsidized by the manufacturers with high residuals and low money factors. New cars can have rebates and low interest rates too, but I think rebates effect the used car market much more.
            If you keep a car for years…buy away. But if you trade often and you are looking at high end autos, leasing should be considered. The business vehicle is a no-brainer for me….although I hate that term. lol
            The second car I will do a one pay lease on for $17,000, only pay the 1% sales tax and have a brand new Lexus GS F Sport for $5666 per year. That is a number I can see, touch and feel. And it is a number I will gladly pay to be in a new car. But that is just my opinion. 🙂

            I have signed up and will look for your post on stocks! I have a lot to say on the market…not much of it good.

  5. To Brad B’s point: I can see how the math can work out in favor of leasing for expensive cars. Especially if you are going to keep the car for only 3 years.

    But we are talking $450+ on a car lease every month in perpetuity. This is VERY expensive in my eyes. I guess it is a matter of ‘taste’.

    • Craig, I agree $450+ a month forever is a lot of money! Which is exactly why I was so against leasing in the past. But what I found out is that there is no way to avoid that loss every month on a high end German luxury SUV! You with either be paying it in a lease payment or “paying” it in depreciation each month. One is obvious and one is hidden but just as real. There is simply no way around it. That is the cost of driving a vehicle like that.

      I could buy used (which I tried) but then I don’t have a New luxury SUV, I have one that is worth $50k and I can now cross shop it with Nissan Armadas, Chevy Tahoes, etc., new.
      Or I could keep the Mercedes for a long time….but that defeats the purpose too, because then I don’t have an $80k SUV, I have a $25k SUV. And it is not the Mercedes logo I want, it is the brand new, spotless, tech and safety loaded SUV.
      And once I figured out that there is NO cheap way to drive that, again leasing became the easy choice. Why not pre-negotiate the trade in value. 62% of the MRSP is really good after 3 years. That eliminates one of the biggest money losers in car deals, the dreaded Trade-in. And no, I do not want the job of selling my own car…and you are not going to just sell a $50k car on Craiglist very easy! Those buyers want the security of a dealer. And just have better things to do…like discuss what a raw deal mutual funds seem to be. 🙂

    • Craig – good to see you, haven’t heard from you in a month…. hope you are hitting it hard out there.

      $450+ on a car lease is a lot? Not necessarily – like you said ‘it is a matter of taste’. I can further add that it depends on one’s net worth/ disposable income.

      The key is to keep all your expenses low enough (as compared to your income levels). I bought my car for less than my monthly salary, so that is less than 8.5% of my annual salary.

      As a thumb rule, one should never go for a car that costs more than 20% of annual salary (10-15% is ideal).

  6. Of course. It is all relative. I am just saying I would rather invest $450/month than pay them for a car 🙂

    BTW: Great comparision on the “infographic” above, however keep in mind images do not show up if I only read the e-mail notification with the comment and do not open the web page. I almost missed it.

    • Oh thank you for letting me know that info-graphic images do not show up in the email notification. Something I will need to fix at some future point in time.

      • Thanks for chiming in guys. I just wanted to share my new attitude toward leasing and that I am consigned to spending a chunk of change yearly for vehicles the rest of my days.
        I didn’t want this to turn into an affordability discussion, because it is not. I am blessed to have a great business here in DFW. I would think everyone on this site is way past wasting money on most things, especially cars.
        And trust me, I preach quite about a cars, notably car payments being the #1 wealth killer. Like Dave Ramsey says, if we all took those car payments we made all our lives and invested that and drove a “cash car” instead, we would all retire rich. I see people all the time rolling about in new Escalades and think, can they really afford that?
        I sometimes err on the side of spending too little. My last car was a little used BMW 335i convertible I bought on Ebay for $23k. I drove it for almost 3 years and traded it for $20k. My mother in law and I joke about how I am “cheap”. I think the correct word would be frugal, but jokes aside she also knows her daughter will never have to worry about money.
        Now somebody help me figure out this stock market!!??!

        • Lol, is it just a co-incidence that my Mother in Law called me a Cheapskate? She was referring to my first date with her daughter – at the end of the date, her daughter asked if we could split and I said ‘It is your choice’. When my MIL heard the story, she said ‘I would have never gone on a second date with such a cheapskate’. I just smiled, I have learned to choose my battles lol.

          By the way, I love DFW area, been there 15 times in 2015… for business.

  7. I have lived in Texas all my life….and business and real estate have been awesome here in Frisco…north of Dallas, for quite a while.
    I have a feeling you wear the Cheapskate label like a badge of honor…I know I do!

    • I know Friso – I used to pass through Frisco on 121 when I would visit my friends in McKinney (Business interest in FW, that is where I stayed).

  8. Well, to add to the discussion, I’d like to note there are always exceptions to the rule.

    Electric cars need expensive replacement of batteries once they hit the 100k mileage. Electric cars, besides Tesla, has depreciated greater than expected. Dealers are still making money, mostly due to the $7,500 tax rebate still available.

    If one has favorable terms for a lease (I took over a $100/month lease on a Nissan Leaf using a “second hand” lease), the cost of ownership can go significantly lower depending on gas prices, and one can still enjoy a relatively new car on the very cheap, with very little maintenance/repair issues. The time saved for the extra money spent was less than minimum wage in my case.

    • I agree on the following two points:

      1. You might be able to get a great ‘one-off’ deal: like the one you got with the Nissan – but extending the logic, sometimes you might be able to get a fantastic deal on buying too. Sometimes dealerships sell cars at a loss to them because they have targets to meet (or a bigger incentive to make).

      2. Existing Government tax breaks might heavily influence the decision between buying and leasing –

      For other factors that you mention (including the depreciation and replacement costs), my original analysis still holds true.

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