Deciding whether to lease or buy a new vehicle is a significant financial consideration. Many believe that committing to a new car, regardless of leasing or buying, immediately exposes you to the steepest part of its depreciation curve. While the choice between leasing and buying has some impact, the primary financial hit comes simply from owning a new car. This is why some prefer older, less expensive vehicles – they offer substantial discounts due to prior depreciation while still retaining the automaker’s expected residual value.
The perception of “savings” often arises from the willingness to drive an older vehicle. 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 that point.
Similarly, someone financing a vehicle with a loan benefits most by keeping the vehicle for more than three years. Selling a three-year-old vehicle and immediately financing a new one minimizes potential savings.
Ignoring electric vehicles for a moment, the most straightforward way to decide between leasing and buying is to compare the money factor (MF) of a lease against the annual percentage rate (APR) of a loan. If the MF is significantly subsidized (around 0.0015 or less in today’s market) and loan subsidies are absent, leasing becomes the more attractive option due to the lower implied interest rate.
When the MF and loan APR are similar, leasing often remains the recommended path. This is because leases typically involve lower monthly payments as you are not paying the principal, and they offer more flexibility. While financing builds “equity” in the vehicle, this equity can be viewed as a disadvantage because the opportunity cost of that equity is tied up in a depreciating asset rather than being available for other investments or uses.
Remember, a lessee retains the option to purchase the vehicle at any point, effectively converting the lease into a financed-loan product to capitalize on any equity upside. Conversely, they can easily end the lease if the residual value is lower than expected. However, a buyer with a loan is always exposed to depreciation without such an easy exit strategy.
Optionality is valuable, and lower opportunity costs are equally valuable. Leases can be highly advantageous for the right individual and under the right circumstances.
If the MF is excessively high, such as with luxury or high-demand vehicles, leasing may not be financially sensible. Conversely, extremely low MF deals make leasing a very compelling option.
Electric vehicles (EVs) introduce another layer of complexity. Initially, the $7,500 federal tax credit often favors leasing, as it is typically passed through to the consumer as a capitalized cost reduction. However, some EV leases then incorporate higher money factors to offset this benefit, as seen with some programs from Mazda and Volvo. In these cases, a strategy of leasing initially to capture the credit and then buying out the lease with a loan can be optimal.
For certain EVs, real-world residual values have proven to be disastrous, with some models losing value rapidly. In these situations, automakers sometimes subsidize lease residuals (examples include the Mercedes-Benz EQS and Audi e-Tron). For these vehicles, leasing becomes significantly less risky than buying and facing potentially steep depreciation.
In summary, the lease-versus-buy decision for new vehicles primarily boils down to comparing the money factor against the loan APR and considering how residual values might impact your specific situation. For maximum savings, operating a vehicle well beyond the typical lease term is generally the most effective strategy.
For a detailed comparison of lease versus buy scenarios, resources like lease calculators can be invaluable. These tools help analyze the financial implications, although they may not fully account for opportunity costs or long-term maintenance expenses.
