Comparing buying to leasing a vehicle is a popular topic. Still, I continue to encounter people who do not fully understand leasing. Both options have their advantages and disadvantages. A wise person keeps an open mind to all the options before a decision is made. Basically, there are two types of vehicle buyers. What type of buyer you are is the determining factor in whether leasing or buying would be your best choice.
The Keeper. This type of person will buy a vehicle, pay it off and drive it for six years or more. The keeper maintains their vehicle impeccably. They usually get any necessary work done at a dealership or reputable mechanic with whom they have formed a relationship over the years. The keeper wants the vehicle to last, so he/she invests money to ensure it will perform over the long haul, including major repairs. It is not uncommon for the keeper to get 150,000 miles or more out of the vehicle and drive it for 10 years. The keeper is not a good candidate for a lease.
The Trader. This type of person always has a vehicle payment or (in the case of a cash buyer) trades every two or three years. Because the trader gets a different vehicle every few years, he/she usually avoids costly repairs. Changing the oil and a 30,000-mile maintenance is typically the extent of repairs. The only reason leasing would not work for the trader is mileage.
If a person drives 20,000 miles or more per year, leasing becomes less attractive, but is still worthy of consideration. The basics behind a lease include a guaranteed residual value based on the length of the lease and mileage. At the end of the term, if the vehicle is worth more than the guarantee, use it as a trade-in. If it is worth less than the residual, the lessee walks away, money ahead. This “walk-away” option is very advantageous for the lessee.
Many finance companies are losing money due to over-inflated residuals. This is money the buyer would have lost if he/she traded the vehicle. Some finance companies are considering whether to continue offering a lease program at all. That says a lot to me. What about cash buyers? Consider someone who pays $30,000 cash for a vehicle. They then want to trade it after three years. That vehicle may be worth $13,000 now. If they had leased it, the residual might have been $15,000. That is $2,000 more than they paid to drive the car for the same amount of time compared to a lease. Not to mention, that $13,000 was tied up in a vehicle instead of being invested in an appreciating asset.
Keep in mind, you can buy your leased vehicle at the end of the lease for the residual value. It might cost a little more than a similar “program vehicle,” but it is worth it because you know its history and maintenance record. You actually end up paying close to the same as if you bought it from the beginning. Consider discussing your options with an auto dealer that offers leasing. Explore your options, keep an open mind and make the decision that is best for you. iBi