Is Leasing a Car Best for Your Budget?

It depends on your budget of course. I’ll try to generalize a little and cover multiple budget scenarios so that whatever your budget is, you can decide if leasing is for you. I’ll start with the costs of leasing vs. buying and move on to the benefits to each with certain income levels/budgets.

Up-Front Costs

First, we’ll look at what you pay when you go to the dealership or work it all out online. So, for the sake of this article, let’s say you’re going to be making payments on a Toyota Tacoma because that’s the car everyone likes, it seems. You’re going to be getting the double cab so that you can fit your medium-sized dog because that’s what everyone seems to have these days. The MSRP of a new Tacoma is $26,000.

• Leasing: When leasing, depending on the dealership, your negotiating skills, and the car, you can pay anywhere from $0 to several thousand dollars for the down payment. A common amount is around $1000.
• Buying: When buying, you usually end up paying around 20 percent of the cost, which for the case of the Tacoma double cab, would be $5,200.

Clearly, right off the bat, leasing saves $4,200, which is an awful lot. Let’s move on.

Monthly Costs

Now, let’s talk monthly budget. Whether you’re leasing, buying new, or buying used, you’re most likely going to be making monthly payments. That is unless you purchase a vehicle with cash, but I’ll talk about that later.

• LEASING: Let’s assume an interest rate of 3%, a normal down payment of $1000 (although it’s frequently possible to have a $0 down payment, which I’ll get into later), and a lease period of 24 months. This would come out to $225/month.
• BUYING: Again, let’s assume an interest rate of 3%, a normal down payment of $5,200, and an average auto loan length of 70 months. This would come out to $325/month.

Once again, leasing saves money, this time by as much as $100/month. We’ve just begun though, so hold on.

Long-Term Costs

We’re going to assume some more things here. Yes, more assumptions! First, let’s assume that the lease is going to continue for the same amount of time as the 70-month auto loan (which is about three 24 month lease terms on a very comparable Tacoma each time). We’re also assuming that you’re keeping the purchased Tacoma and not selling it. We’re also not including gas or insurance, both of which are unavoidable constants.

• LEASING: If we multiply the down payment by three (1,000 x 3) and multiply the monthly payments by 72 (225 x 72), we get $19,200 over six years.
• The other thing we’re going to assume is that the 24-month lease term coincides with the Tacoma’s warranty so that there are no other out of pocket expenses.
• BUYING: We simply add the down payment to the auto loan. This means adding $5,200 to the auto loan of $22, 699. This means you would be spending $27, 899 over the course of six years.
• However, after the warranty is up (usually after 2 or 3 years), maintenance is the responsibility of the car owner. Let’s say it was a three-year warranty, which means that the following three years in this scenario are not covered. According toNerdWallet, the monthly average for car maintenance is $99 (let’s just use 100). So the real cost is $31,499 over six years.
• But you own it. That’s a big difference. Tacomas have an especially high resale value, but we’ll talk about that in a second.

Ending Costs

In our scenario, you’d spend $31,499 over the course of six years if you bought the car and $19,200 if you leased it. However, you could probably sell the Tacoma for $17,000 and if you leased, you’d have no money whatsoever.

 On the other hand, if you save the money that would have been spent buying the car (the down payment along with the difference in monthly payments and maintenance), and you could have saved around $17,000 by putting that money in a low yield investment like a CD.

At this point, both buying and leasing seem to be equal in this scenario, at least monetarily. It should be noted that one major benefit to leasing is having a new car every two years, and a benefit to owning is not having to clean up your dog’s hair. It should also be noted that this is just one specific scenario. Leasing or buying obviously depends on the vehicle type and other factors. In fact, it all depends on everything!

Buying with Cash? That Cash Could Go to More Important Purchases

It seems like a good idea. In fact, many people believe that it’s the most cost-effective way to purchase a vehicle. Well, depending on your budget, that could be entirely false.

Let’s say that you have a steady income and have saved up $26,000 to buy a car. You buy the car, and it’s immediately worth 15-20% less. The only money you would have saved is the interest, which in our scenario, is $1,899. However, as shown in the example above, what if you immediately saved all that money and instead leased a car? This is where it gets interesting.

We will take the $1,000 dollars out of the saved money, leaving $25,000. Imagine the opportunities you have with $25,000. A new house? Start a retirement fund? Money for kids for college? There’s a lot that such a large sum can do besides immediately lose value.

What’s Best for Your Budget?

First of all, what is your budget? Do you have disposable income? Do you want to use your money on something else? You need to think about the longevity of your budget and how it will evolve. It all depends on what your objectives are.

As far as leasing goes, it doesn’t really matter what your income level is because the initial cost is so low and the lease term lasts for only 2-3 years. Yes, you do need to make all the payments during that term, but it’s a much easier commitment than the ridiculous length of most auto loans these days that keep getting longer and longer.

Just MAKE SURE to properly negotiate your lease term based on the reasons why you are leasing. Amount of miles, specific car features, lease term length, and “normal” wear and tear are things that can be discussed/negotiated with the dealers at the dealerships, or, for a lot less hassle, use carlease.com where you can set your own terms. Either way, leasing can work for any income level and therefore, any budget.

Why Leasing Beats Out Buying

In the short term, leasing is financially better than purchasing a vehicle because of the lower monthly payments and the lower upfront costs as mentioned above. If your goal is to purchase and own a vehicle for a lengthy period of time (over 6 years, in this case), and you have the money to do it, then buying can be a better option.

On the other hand, leasing provides an easy way for us to have newer and technologically advanced vehicles and purchase other important items as well. Additionally, lease terms (should) coincide with the new car warranties, which means removing the extra headache of maintenance and worry for the duration of the lease.

If, however, you are someone who wants to purchase and own a new car every 2-3 years, it’s not the best idea financially. Leasing is far friendlier to any budget. See below.

In the figure above, we have an image detailing the costs over time of leasing vs. buying. This graph is assuming that we are renewing the lease after each lease term for the same vehicle. It’s also assuming that every 3 years, the same car is purchased with a trade-in. This clearly shows that leasing is a smarter long-term financial decision.

So, the short answer is yes, leasing can be financially better for your budget than buying. Just think about why you need a car and if you want to have money tied up in a vehicle for long-term or have more money to use elsewhere in the short term.

In conclusion, leasing is better for your budget:

• When you purchase new cars every 2-3 years
• The downpayment is considerably less, if not nonexistent
• The monthly payments are cheaper
• You only need a car short-term. It’s a much shorter financial commitment (2-3 years) as opposed to a car loan that can last upwards of 70 months.
• You want the benefits of a brand new vehicle (such as the manufacturer’s warranty) without the hassle of selling or trading in the vehicle at the end

What You Should Know About Leasing

If you do decide to go forward with a lease, there are some important things to keep in mind so that leasing remains a good idea for your budget.

Going to a dealership

It’s possible to go to a dealership and get exactly what you want. It may not happen the first time you go, however. Do your research about the value of the car you’re interested in before going in. In that research be sure to include the potential residual value of the car after the lease term.

Finding a vehicle with a high residual value (like a Tacoma!) ensures that you’ll pay a smaller monthly fee. Figure out how much the car will likely be worth after 2 years so that you can better negotiate the estimated depreciation, which can give you a better price. The dealers are trying to make money, so you have to be willing to work just as hard to make the lease work for you.

Here are some other good things to keep in mind when leasing from a dealership:

• Know your credit score and what you qualify for.
• Don’t pay too much up front (ideally nothing over $2000). In fact, sometimes you can get away with paying nothing up front. If anything happens in the first few months of the lease, all that up-front money will be for nothing. Save the money for the monthly lease payments.
• Research gap insurance to avoid owing more than the car is worth.
• Really think about how many miles you’ll drive.
• Find out exactly what “normal wear and tear” is so that you can return the car and not owe more money.
• Don’t lease for too long. Two to three years is ideal. After that, the warranty is over and you may be paying for some expensive maintenance.

Leasing Online

WE MAKE LEASING CARS SUPER EASY AT CARLEASE.COM

Just like with almost everything else in your life, you can lease a car online. This is frequently an easier and more pleasant experience than haggling with car salesmen. Go ahead, get online and lease from your house at Carlease.com. Again, it’s still a good idea to keep in mind all the information I listed above in the dealer section.

Here are some good things about going online:

• You can quickly and easily find multiple leasing options.
• There’s no pressure from a sales rep. Take your time
• Carlease.com offers home delivery
• You can set the terms you want instead of arguing with somebody.

Honestly, it’s much less of a pain in the neck to go online. At Carlease.com, you can browse inventory and lease without having to set foot on a dealers lot.

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