21 October 2004
The Simple Economics of Buying vs. Leasing or Renting
I got into a friendly argument with a buddy of mine recently. He and I are an unlikely pair to be friends. He loves to go out dancing at clubs for fun. For me that’s about as much fun as picking up Rusty’s poo from the back yard. So the argument was on whether or not it was a good idea to lease a car. He leases his Audi and I bought our Subaru. He prefers leasing his car for the fun of having a new car, no headaches with purchasing, and any maintenance and repair they pay for at the dealership. I suggested that buying is a better option, because though you pay for more maintenance, it’s economically smarter and you get the fun of owning a new car.
We bought our Subaru for about $21,000. We bought it brand new. We got a pretty nice package. Heated seats, cd player, and all that. We financed the car on a 4-year program, which comes out to about $450/month. Not bad, but not amazingly good. I’d consider this to be a pretty average for a low-to-mid-range new car.
If one were to lease this car, he or she would pay a bit less per month. Let’s assume it would cost $300 per month on a four-year lease. It could be more, maybe even less.
Let’s consider some of the extra costs of this car that I have to pay for, since I am buying.
- Out of warranty maintenance (oil changes, wheel-alignment, new tires, etc.), though some dealerships will pay for all of this maintenance for the first three years.
- Depreciation (I bought the car new for $21,000, but 2 years later, it’s not worth that anymore)
So, let’s quantify these extra costs on a per month basis, using fairly arbitrary numbers. This is just assuming what it would be like during those first four years, as we’re comparing to what things would be like compared to leasing a car.
- Maintenance: $37
- Oil change at dealership: $35 (4x per year)
- Super-Deluxe Tune Up: $100 (1x per year)
- Deluxe 70k mile tires: $400 (1x every four years)
- Total: $1360 / 48 months = $36.67 per month
- Depreciation: This is a big one. I looked up the value of a 4-year-old Subaru Forester, and discovered the trade-in value is about $12000. Granted, selling it to a private party would get you more, and it’s possible that my car could be worth more than that after it’s four years old, but let us be conservative.
So, with leasing this car, one spends just $300 per month for four years. The total on that is $14,400
And with buying a car, you spend $450 per month on the payment, and $37 per month on maintenance. Total: $22,960.
The difference between the two is $8,560. That’s how much more that I pay in buying my car. However, at the end of that four years, the one who leases has nothing. At the end of that four years, I have a car. I can trade it in for at least $12000, or keep it. It’s obvious that you’re saving quite a bit buying a car.
- Consider buying used. You don’t pay the premium on the new car, and you still get a car that’s a year or two old and in great condition. The premium you save can pay for extended warranty and a trip for your family to Italy (well, maybe not).
Ridiculously Good Financing deals that most dealerships offer right now far undercut the 3.9% we’re paying right now. This significantly brings down your monthly costs of buying. These deals typically only come with new cars.
- Pay off your car early. Often we pay twice or three times the minimum payment, bringing our payoff date closer and closer. Bonus: That’s less interest they can earn on your loan.
- Do some maintenance yourself. I do most of our oil changes at home. It’s fun and cheaper. You can take the 10 or 15 bucks I save and take your loved one out for a mini-date.
- Buy an $800 car. Sure, you’ll have much more maintenance costs and it won’t last as long. But, you save $20,000.
I did this exercise, in part, to discover for myself the economics of buying a brand new car. I can’t see how anybody in their right mind would lease, given these considerations. I’ll admit that I might be missing something.