No matter what a salesman tells you, the total cost of a long-term purchase will always be a lot lower than the cost of multiple short-term leases. The reason: depreciation. Most new cars lose about 40% of their value in the first two years, so if you get three 2-year leases in a row, you’ll be paying for 120% of a car—plus interest—and you’ll have nothing but canceled checks at the end of the
third lease.
Since most people keep their cars for at least 6 years (7.8 to be exact), we’ll use that term of ownership in a comparison with two consecutive 3-year leases on the same car. The terms are the same as before: $20,000 car, 3-year lease and 5-year loan, 8% APR for both. Here’s how the comparison works:
On the purchase side, you would make 60 payments of $406 which totals $24,360. At the end of 6 years, you would own a car that’s worth around $5,000 to $6,000. If you sold it for $5,000 at that point, your net cost of ownership would only be $19,360 for 6 years.
On the 3-year lease, you would be paying $378 for 36 months, which totals $13,608. Since you need a car for another 3 years, you lease again at the same terms, spending another $13,608. At the end of 6 years, you’ve spent $27,216 to “rent” two cars (and maybe another $900 in acquisition fees).
Now, the “leasing specialists” would argue that you would have to pay a lot of repair bills if you kept that car for 3 more years. (Are they implying that their cars aren’t built very well? If that’s a valid point, maybe you should find a better car—at another dealer.) Nice try, guys, but the increased insurance and registration costs from leasing a new car every two or three years will usually cancel out any “savings” from not having to pay for repairs.
As you can see from our example, it’s about $8,000 cheaper to buy a car and keep it than it is to continue leasing. But it won’t have that “new car smell,” and only you can decide how much that’s worth.
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