Deciding whether to lease or buy a new vehicle is a significant financial consideration. Many believe that committing to a new vehicle, whether through leasing or buying, immediately places you on the steepest part of its depreciation curve. While the method you choose – lease or buy – has some impact, the largest financial hit often comes simply from owning a new car. This is why some prefer older, less expensive vehicles; they represent a more financially sound short-term transportation solution, depreciating less while still offering reliable functionality.
The perception of “savings” often arises from the willingness to drive an older vehicle for a longer period. When a lease concludes, a lessee has the option to purchase the vehicle at its residual value and continue driving it. This strategy can indeed “save money” compared to entering into a new lease at the same point.
Similarly, someone who finances a vehicle with a loan from the outset benefits most by keeping that vehicle for more than three years. Trading in a three-year-old vehicle for a new one with a new loan negates much of the potential financial advantage.
Leaving electric vehicles aside for a moment, the simplest way to decide between leasing and buying is to compare the lease’s money factor (MF) against the Annual Percentage Rate (APR) of a car loan. If the MF is significantly subsidized (for instance, 0.0015 or less in the current financial environment) and loan subventions are absent, leasing becomes a more attractive option due to the lower implied interest rate.
When the MF and loan APR are comparable, leasing often remains the recommended path. This is primarily because a lease does not necessitate principal payments, resulting in lower monthly payments. While a loan allows you to build equity in the vehicle over time, this equity can be viewed as a less advantageous asset. The opportunity cost of having equity tied up in a depreciating vehicle means that capital is not available for other uses or investments.
Crucially, leasing provides optionality. A lessee can choose to purchase the vehicle at any point, effectively converting the lease into a financed purchase to capitalize on any potential equity. Conversely, if the residual value is unfavorable, they can simply return the vehicle at lease end. A buyer financing a vehicle lacks this flexibility and is always exposed to the full brunt of depreciation without an easy exit strategy.
This inherent optionality and lower opportunity cost make leasing a valuable tool for the right individual.
However, leasing is not universally advantageous. If the MF is excessively high, such as might be encountered with luxury or high-demand vehicles like a G-Wagon, leasing becomes financially impractical. Conversely, extremely low MF deals strongly favor leasing.
The landscape shifts somewhat with electric vehicles (EVs). While the $7,500 federal tax credit initially seems to favor leasing by being passed through to the lessee, many EV leases incorporate inflated money factors to offset this benefit, as seen with some programs from brands like Mazda and Volvo. In these scenarios, a strategy of leasing initially to capture the credit and then immediately buying out the lease with a loan can be optimal.
Furthermore, the real-world residual values of some EVs have proven to be disastrous, with some models like the Mercedes-Benz EQS losing nearly half their value rapidly. In such cases, automakers often subsidize lease residuals for vehicles like the EQS and Audi e-Tron to make leasing more attractive. For these vehicles, assuming the depreciation risk through buying makes little financial sense.
In summary, the lease-versus-buy decision for new vehicles fundamentally comes down to a comparison of the Money Factor against the loan APR, and how specific use cases are affected by predicted residual values. For maximizing long-term savings, operating a vehicle well beyond the typical lease term remains a sound strategy.
For those interested in a detailed lease-versus-buy financial comparison, resources like the Leasehackr calculator offer tools to analyze these scenarios, although they may not yet fully account for opportunity costs or long-term repair and maintenance expenses.
