Updated: Jun 2
Having assisted car shoppers for the latter part of my life, the most common question I’m asked is if one should lease or buy. I cannot tell you how much misinformation is out there due to people’s bad experiences and misunderstandings about cars. I felt the need to clear the air and write this article.
Here’s the first thing you need to know about the truth about leasing vs. buying.
THE FUNDAMENTAL TRUTH ABOUT CAR OWNERSHIP
FACT: Car ownership is an expense. I find that many people look at their cars as though they are assets- but this is the wrong view of car ownership- and it could cost you thousands.
If there’s any take-away from reading this article, it’s to shift your thinking that your car is an asset and shift into the understanding that cars are expenses.
What’s the difference? If cars were assets, the question would be, “what kind of car do I want to own?” But because cars are expenses, the real question is “how should I best lose my money?”
You might’ve heard this before: “I don’t like to lease because, at the end of the day, I have to return the car and I have nothing to show for my monthly payments.” I hear this all the time, and fundamentally, the logic is off here. Here’s why it doesn’t make sense:
You’re looking at your car as a value-holding asset. Cars do not hold value- they lose it. They can have value- but that value is constantly dropping.
Cars are tools that we use that degrade with usage and time. They don’t build value (unless you have a rare collector’s car). They lose it. Some more rapidly than others.
So the question is, what’s so nice about owning a depreciating value? I’m not saying it’s not worth it to buy (I’ll get to the pro’s of buying in Part 3 and 4). But my question is directed to the “asset” understanding of car ownership.
There’s a mental struggle when it comes to car ownership. For some reason, we think that “owning” a car is better than “borrowing” a car. But at the end of the day, it’s all about how much you are losing on average.
You can potentially lose more by owning a car than by leasing it. On the contrary, you can lose less by buying a car and keeping it than by leasing it.
But did you know that you have “a car payment” even if you’ve finished off your loan? It’s called depreciation and maintenance. The reason being is that you still pay to operate your car on a monthly basis- it’s an expense.
Fundamentally, car ownership is different from home ownership. Many people wish to buy a home because they rather have their monthly rent go into their own equity. The logic works here because houses, typically, hold equity and value. But, again, cars do not hold value- they lose it.
Cars depreciate with use. That is a fact. Do not mistake the fact that you are out of a car payment when you’re finished with the car loan.
How to properly approach the question of leasing vs buying is to see car ownership as an expense. How much is it really costing you, per month (or per year), to operate your car? This is the first step to figuring out if leasing or buying is better for you.
Here’s a case study:
A close friend of mine bought a 2006 Mazda 6 three years ago for $6,000. 40,000 miles later, she wants to replace her car for a newer car. She can sell the car for approximately $2,500. So her net loss was $3,500 over 40,000 miles right? Wrong.
Throughout her three years of ownership, she totaled about $2,000 in repairs. So now, her net loss is $5,500 over 3 years and 40,000 miles. Or an average of approximately $152.78/mo.
She also lost valuable time throughout the week with her car being in the shop for repairs. In addition, her maintenance expenses were big, one-time, costs ($600 for tires here, $400 for brakes there). These expenses were not spread out evenly throughout the 36mo of ownership.
But let’s not stop there. Her current car averages about 22mpg in mixed driving (her car can probably use a tune up) and the 2006 Mazda 6 still incorporates 14-year-old safety technology and creature comforts. (She’s desperate for an aux jack.)
For the sake of the argument, let’s not factor in the lost time at the mechanic (potentially 50hrs or so), the increased gas costs, and the lack of the latest safety technology. We’re back at $152.78/mo.
Her average expense (aka loss) was $152.78/mo. This car costed her $152.78/mo to operate over the course of her ownership. The numbers do not lie. Should she have leased a car at $152.78/mo, it would’ve costed her the exact same amount, with less risk to the depreciating car.
Whether you approach car ownership by leasing or buying, diligent shoppers will approach car ownership as an expense.
The question from there is, how do you want to lose $152.78/mo?
Check out the following articles to continue:
Leasing vs Buying Part 2 – Why smart people lease.
Articles to come:
Leasing vs Buying Part 3 – When buying a used car is the wisest choice.
Leasing vs Buying Part 4 - The only time buying a new car makes sense.
Leasing vs Buying Part 5 – Budgeting for car shopping: a dollar is a dollar.