When in the market for a new car, the question always arises: Is it better to buy or lease? The answer, as with many decisions in life, isn’t one-size-fits-all. While opting for a used car can often be a prudent choice, let’s explore buying vs leasing a new car.
Buying & Financing a New Car
Let’s say you found the car you wanted to purchase for $50,000. After closing costs like sales tax and dealer fees, the total financed amount is $50,000 after a $5,000 downpayment. If your rate is 5%, and your term is 4 years, your payment will be $1,151.46.
Leasing & Financing a New Car
Instead of purchasing the car, you go the route of leasing it. After closing costs like sales tax and dealer fees, the total financed amount is $25,000 after a $2,500 downpayment. If your rate is 5%, and your lease term is 4 years, your payment will be $575.73.
Which Route is Better?
The reason lease payments are less is that you don’t own the vehicle at the end of the term. You and the dealer agree on the value of the vehicle at the end of the term and finance the difference. Essentially, you are financing the depreciation of the vehicle, and this decision is made at the time of purchase.
Usually, your lease will include a purchase option. The purchase option price is determined at the beginning of your loan term. Let’s say that this amount was the residual value calculated earlier of $25,000. If you used the purchase option, your payment on the lease would be the same $575.73 for another 4 years.
By using the purchase option, you have the same total interest on the loan, but end up paying it over 8 years instead of 4. What’s even stranger is if you decided to finance the total $50,000 over 8 years at 5%, your payment is $633 / month which adds an extra interest over the life of the loan of $5,497.32.
Summary
In our opinion, if you end up purchasing a used car, buying it tends to be the prudent option. If you are looking for a new car, leasing it tends to by more favorable, especially if there is a purchase option. As allows, each situation is different, so we encourage you to run these numbers independently.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.
