Buy or Lease: The Cheapest Way to Drive

7 copy.png

There are a dozen choices that go into buying a new car. Agave Green or Wimbledon White? The luxury trim or the sports package? However, there is one decision that will impact your budget even more than heated seats: whether to drive or lease. Leasing has never been more popular in the United States. This financing option makes sense if you value flexibility or smaller monthly payments, but for those who just want to spend as little as possible on a vehicle, buying is generally the far better option.

Let’s say you’ve negotiated an out-the-door price of $31,000 for a brand-new Honda CRV. Named a top pick by CarGurus for its value retention, depreciation should be minimal. With excellent credit, you might qualify for a five-year loan with no down payment at an interest rate of 1.99%. Your monthly payment would be $543 a month, or $32,580 over the length of the loan. To rent the same car for six years, you will typically need two three-year leases, with an total cost of $2,500 in acquisition, disposition and other fees. With the same $0 down, you are looking at $389 a month, or $30,508 over 72 months. Based on average estimates from AAA and Edmunds True Cost to Own® system, we can approximate total repair and maintenance cost of $2,306 over six years with a lease, or $5,836 with a purchase (being that Edmunds only goes 5 years out, we took the AAA average annual maintenance costs of $1,186 and added them for year 6 of the purchase). That brings the six-year cost of $32,814 to lease and $38,416 to buy.

On the surface, it looks like leasing would be a lot cheaper. However, this math does not factor in that you can sell a car you own. Based on averages taken from the Edmunds TCO system, a 2019 CRV in good condition can expect a resale value of $14,000 after six years. That means you could save over $8,000 if you had bought the car and sold it than if you leased for the same period.

With a lease, depreciation will be the biggest factor affecting your monthly payment. A luxury car that holds it value better may still have a lower bill than a less expensive car without the same price resistance. However, that’s not always an argument for renting. With a paid-off car that holds its value, you can continue to drive it for free and still recoup a fair amount if you decide to sell later.

Buying is also the better choice if you plan to drive your car a lot. Most lease agreements limit your mileage to 12,000 a year, or 1,000 a month, and will charge you somewhere between $0.10 and $0.30 for each mile you go over the allowance. The extra cost can rack up quickly. At an average penalty of $0.15/mile, going over by even 10,000 miles could set you back by $1,500.

Buying may not make sense in every scenario. The size of your budget will also affect whether you lease or buy. In the scenario above, buying a car would cost over $150 a month more to buy, not to mention the cost of repair. Total mileage and regular maintenance also impact the rate of depreciation, so you may have less residual value than expected if you are not diligent with care.

Finally, consider your personal preferences. If you do not see yourself holding onto a vehicle for more than three years, buying is much less attractive. If the car is being used for business, you may be able to deduct lease payments on your firm’s taxes—which could significantly change the equation in favor of leasing. You also shouldn’t underestimate the value of a reliable mechanic. If someone you trust can change the oil and make repairs, a lease agreement that includes routine maintenance and vehicle repair will be less valuable.

There is no cut-and-dry answer which is the better choice. Whether you decide to lease or buy will depend on your situation. Leasing typically comes with lower upfront costs and monthly payments, and are ideal for people either using their car for a business or who change cars more often. You may also prefer to lease if it means you can afford a more expensive car than you are able to buy. If you decide to rent, see our guide to leasing a car here.

If you are able to buy and hold onto the car, purchasing could often save you significantly over the life of the vehicle. Unlike a lease, your monthly payments build equity. You will eventually own the car after the loan is paid off, typically in five to seven years. The residual value of the car after your loan is paid off will usually wipe out any temporary savings you may get from leasing in the short-term. On a purely cost basis, buying almost always trumps a lease.