Deciding whether to lease or buy a new vehicle is a significant financial consideration. Many consumers are drawn to the allure of driving a new car without the long-term commitment of ownership, making leasing an attractive option. However, understanding the nuances of lease programs is crucial to ensuring you’re getting the best deal. When you enter the realm of new vehicles, whether through leasing or buying, it’s important to recognize that you’re immediately encountering the steepest part of the depreciation curve. While the lease versus buy decision has its own implications, the primary financial impact comes simply from acquiring a brand-new car.
The perceived “savings” often associated with used vehicles stem from embracing older models. Think of it like this: used cars, sometimes humorously referred to as “fart cars,” function as short-term rentals that have already absorbed significant depreciation. These vehicles are offered at discounted prices while still retaining the automaker’s expected residual value principles. This contrast highlights a key financial principle in vehicle ownership.
When a lease agreement concludes, the lessee has the option to purchase the vehicle at its residual value and continue driving it. This strategy can lead to cost savings compared to entering into a new lease at that time. Similarly, individuals who finance a vehicle with a loan benefit most by keeping the vehicle for more than three years. Frequently trading in a three-year-old financed vehicle for a new one with another loan diminishes potential savings.
Ignoring the complexities of electric vehicles (EVs) for a moment, a straightforward way to evaluate leasing versus buying is to compare the money factor (MF) of the lease against the annual percentage rate (APR) of a loan. In situations where the MF is significantly subsidized (e.g., 0.0015 or less in the current market) and loan subventions are not available, leasing often emerges as the more financially sound choice due to the lower interest rate.
If the money factor and loan APR are comparable, leasing is generally still advisable. This is because lease agreements typically involve lower monthly payments as they don’t require principal payments. While financing builds “equity” in the vehicle, this equity can be considered a less advantageous asset. The opportunity cost of this equity is that it’s tied up in a depreciating asset rather than being available as cash for other uses or investments.
Remember, a lease provides optionality. Lessees retain the flexibility to convert their lease into a financed purchase at any point, capitalizing on potential equity if the vehicle’s value exceeds the residual. Conversely, they can easily end the lease if the residual value is higher than the market value. However, those who finance a purchase are continuously exposed to depreciation without the same exit flexibility. This optionality and the lower opportunity cost are key advantages that make leasing valuable for many consumers.
Of course, there are scenarios where leasing is less favorable. If the money factor is excessively high, such as with luxury vehicles like a G-Wagon, leasing becomes less economically sensible. Conversely, extremely low money factors make leasing an obvious choice.
The landscape shifts slightly with electric vehicles. Initially, the $7,500 federal tax credit passed through to leases seemed to heavily favor leasing EVs. However, to counteract this benefit, some manufacturers, like Mazda and Volvo, often implement higher money factors in their EV lease programs. In such cases, a strategy of leasing initially to capture the credit and then buying out the lease with a loan can be optimal.
Furthermore, real-world residual values for some EVs have proven to be significantly lower than initially projected, as seen with models like the Mercedes-Benz EQS and Audi e-Tron. In these instances, automakers often subsidize lease residuals to make leasing more attractive. In these high-depreciation EV scenarios, assuming the risk of ownership through financing becomes less appealing compared to the limited depreciation exposure of leasing.
In summary, the lease versus buy decision for new vehicles primarily hinges on a comparison of the money factor against the loan APR, and how specific usage scenarios are affected by residual values. For those prioritizing savings, extending the use of a vehicle beyond the typical lease term remains a sound financial strategy.
To make informed decisions, resources like lease calculators can be invaluable for comparing lease versus buy scenarios, although they may not always factor in opportunity costs or long-term maintenance expenses. By carefully evaluating these factors, consumers can navigate the complexities of car leasing and identify programs that best align with their financial goals and driving needs.
