Automobile owners may be unknowingly wasting thousands of dollars making the wrong choice when getting a new vehicle. Maybe you’re included in this group. Many people purchase a vehicle with the thought that they will keep it long past the life of the loan, saving money by not having a car payment for those years. Unfortunately, the facts suggest this is not what really happens.
Let’s look at some national statistics regarding car ownership:
- The typical length of a new car loan is getting longer. In 2015, it reached an all time high of 67 months. That means that the average person financing a new vehicle is getting a 5 or 6 year loan.
- According to a study done by IHS in 2015, new car owners on average kept their new car for just over 6 years.
Considering these two pieces of information together, the typical new car buyer that financed their vehicle got a 5 or 6 year loan, and then got rid of the vehicle shortly after the loan was paid in full. Which begs the question, was purchasing the vehicle the right choice, or would they have been better off leasing the vehicle instead?
While there are many factors at play, let’s ignore many of them and simply look at the total of monthly payments made for someone that purchases a vehicle with a 6 year loan compared to someone that leases a vehicle. For this example I’ll use a 2017 Chrysler Pacifica I found in an ad for a local car dealership with a sticker price of $26,240.
Cost To Purchase
- Purchase Price (after rebates) : $26,240
- Monthly Payment (6 year loan, 2.39% interest) : $391.56
Total Amount Paid Over 6 Years: $28,192.32
Cost To Lease
- Monthly Lease Payment : $239
- Amount Paid For Term Of Lease : $8604
When the lease ends after 3 years, this person would then choose to lease another vehicle. Prices have likely gone up, so for simplicity sake, let’s add 10% to the monthly lease payment.
- Monthly Lease Payment: $263
- Amount Paid For Term Of Second Lease: $9486
Total Amount Paid During Both Leases Over 6 Years: $18090
Analysis
The cost to lease two different vehicles (each with a 3 year term) for a total of 6 years costs $10132.32 cheaper than purchasing the same vehicle. According to auto loan depreciation calculators, the purchased vehicle would be worth $4,460.80. Adjusting for that, the lease scenario cost $10,132.32 – $4,460.80 or $5671.52 less than purchasing the vehicle.
Leasing a vehicle can be thousands of dollars cheaper than buying the same vehicle!
As mentioned at the beginning, there are many other factors we are ignoring here such as a down payment due at the beginning of a lease, a shorter loan term, comparison of purchasing a car just a year or two old, and many other things. The point is that given the average loan length, and the average length of ownership, the answer to the “buy vs lease” question isn’t as cut and dried as many may think. When purchasing a new vehicle, one needs to ask themselves just how long they plan to keep the vehicle, and do this exact analysis to find out which route is most cost effective.
How about you, EOD Nation, have you ever done the calculations and determined that leasing may actually be more cost effective than buying a vehicle?
We’ve looked at buying versus leasing. When you put 30,000 miles per year on your car, leasing is not as affordable. When you have a short commute to work and don’t have to many errands to run (including children), leasing could be a great deal.