Leasing vs Buying a Car: Which is ACTUALLY Cheaper in 2024?

Summary

This video compares the financial aspects of leasing versus buying a car, breaking down costs like depreciation, interest, and taxes. It explains that leasing often offers lower monthly payments but leaves you without ownership at the end, while buying typically results in higher payments but leads to full ownership. The host uses the example of a Toyota RAV4 Hybrid to illustrate the costs and benefits of each option over 3- and 5-year terms. The video concludes by advising which option might suit different lifestyles and financial priorities.

Takeaways

• 🚗 Leasing a car is like renting it for a set period, typically 3 years, and involves making monthly payments that cover depreciation, interest, taxes, and fees.
• 💸 Buying a car involves paying the entire value of the car, with monthly payments covering both the principal and interest over a longer term, usually 5 to 6 years.
• 📉 When leasing, you only pay for the depreciation of the car during the lease term, making it generally cheaper on a monthly basis compared to buying.
• 📊 Leasing a Toyota RAV4 hybrid for 3 years would cost around $17,000, whereas buying it for the same period would cost about $34,000, but with higher resale value afterward.
• 📈 The resale value of a car after owning it for 5 years can offset the total ownership costs, making buying a car more economical in many cases.
• 📉 Interest rates, loan terms, and depreciation play a major role in determining whether buying or leasing is more cost-effective.
• 💰 Leasing may be a better option for people who want lower monthly payments, prefer driving a new car every few years, or have businesses that can write off payments.
• 🔧 Buying offers more flexibility in terms of mileage limits and ownership, while leasing often includes restrictions and penalties for exceeding mileage caps.
• 🚘 Cars that depreciate quickly or have high maintenance costs, like luxury vehicles, are sometimes better suited for leasing rather than buying.
• 🤔 Overall, buying tends to be the better financial option if you plan to own a car for a long time, value ownership, and don’t want the limitations of leasing.

Q & A

What factors should be considered when comparing leasing and buying a car?

When comparing leasing and buying, factors to consider include depreciation, interest rates, maintenance costs, taxes, and fees. Intangibles like the sense of ownership, flexibility, and mileage limits also play a role.

How does the monthly payment structure differ between leasing and buying a car?

In leasing, monthly payments cover depreciation, interest, taxes, and fees. In contrast, buying involves payments on the entire car value, plus interest if financing, making buying typically more expensive per month.

What are the benefits of leasing a car compared to buying one?

Leasing generally offers lower monthly payments, limited responsibility for maintenance, and flexibility to drive a new car every few years. It can also offer tax advantages for business owners.

What are the drawbacks of leasing a car?

Leasing comes with limitations like mileage caps and possible early termination fees. You don't own the car at the end of the lease, and if you want to keep it, you must pay a residual value.

How is depreciation accounted for in a lease?

In a lease, you pay for the car's depreciation during the lease term. For example, if a car depreciates by $10,000 over three years, your payments will cover this depreciation, not the full car value.

What is a residual value in leasing, and why is it important?

The residual value is the car's estimated worth at the end of the lease. It's important because you can buy the car at this price, which is often lower than the car's market value, offering potential savings.

How does financing a car purchase over five years compare to leasing it for three years?

Financing a car over five years results in higher total payments due to interest but grants full ownership. Leasing for three years has lower monthly costs, but you may pay more long-term if you decide to purchase the car later.

When might it be better to lease a luxury or sports car instead of buying one?

Leasing can be better for luxury or sports cars with high maintenance costs and rapid depreciation. Leasing allows you to drive a more expensive car at a lower monthly cost without worrying about long-term maintenance.

What are some advantages of buying a car outright?

Buying a car outright provides full ownership, with no mileage limits or lease terms to worry about. It can be more economical long-term, especially if you plan to keep the car for many years.

What personal factors should influence the decision to lease or buy a car?

The decision depends on personal preferences such as the desire for ownership, how long you plan to keep the car, your driving habits (mileage), and whether you prefer lower monthly payments with leasing or long-term savings with buying.

Outlines

00:00

🚗 The Leasing vs. Buying Debate

The video opens by introducing the commonly debated topic of leasing versus buying a car. The goal is to determine the better financial decision by breaking down the total cost of car ownership. There are various factors to consider, such as depreciation, maintenance plans, and the emotional aspect of ownership. The video highlights that the current auto loan interest rates in the U.S. are high, making leasing an appealing option for those seeking lower monthly payments.

05:01

💸 Understanding the Cost Breakdown of Leasing

Leasing a car is compared to renting it for a set period, typically 3 years, after which the car is returned to the dealership. Monthly payments in a lease cover four key components: depreciation, finance charges, taxes, and fees. The video uses an example of a Toyota RAV4 Hybrid to explain how these payments are structured, with an emphasis on the fact that leasing generally results in lower monthly payments because you're only financing the depreciation, not the entire value of the car.

10:03

🔧 The Numbers Behind Buying a Car

Next, the video discusses the cost of buying a car. Using the same Toyota RAV4 Hybrid example, it explains that buying usually involves a down payment and financing the rest over a longer term (5 to 6 years). The video breaks down the total cost over 5 years, including interest rates, depreciation, and potential resale value. It explains how the total cost of ownership changes with different financing terms and how monthly payments differ based on whether the buyer finances the car for 3 or 5 years.

📊 A Comparison Between Leasing and Buying

A direct comparison between leasing and buying is made, focusing on a 3-year period for both scenarios. The total cost of car ownership is calculated for both leasing and buying, showing that leasing results in higher overall costs if you return the car after the lease ends. However, the video notes that if you buy the car at the end of the lease term and resell it, the gap between leasing and buying costs can narrow significantly due to market conditions that favor higher resale values for used cars.

💼 Factors That Affect the Decision to Lease or Buy

The video outlines several factors that should influence the decision to lease or buy. Leasing may be a better option for those who want to drive a new car every few years, especially for luxury or high-maintenance vehicles. Leasing also appeals to business owners who can write off lease payments and those who want fewer maintenance responsibilities. On the other hand, buying is generally better for those who prefer long-term financial savings, ownership pride, and flexibility without mileage restrictions.

🛠️ Pros and Cons of Leasing

Leasing comes with its own set of advantages and disadvantages. The video explains that leasing often comes with mileage restrictions, early termination fees, and no car ownership at the end of the term. However, leasing offers lower monthly payments, fewer maintenance worries due to warranties, and the ability to upgrade to a new car every few years. The key downside is that, unlike buying, you don’t build any equity in the car.

🏆 Conclusion: When Buying Is Better

In conclusion, the video states that buying is generally the better option for most people, particularly if they plan to own the car for 5 to 10 years. Leasing, while appealing for short-term convenience and lower monthly payments, typically costs more over time. Buying also provides the peace of mind of ownership without the constraints of mileage limits or early termination fees. The video encourages viewers to assess their personal preferences and financial situation to make the right choice.

Keywords

💡Leasing

Leasing refers to the process of renting a car for a set period, typically around 3 years. In this video, leasing is described as a cheaper option compared to buying, as it mainly covers depreciation, finance charges, taxes, and fees. The lessee returns the car at the end of the lease term unless they choose to purchase it. The script highlights how leasing offers lower monthly payments but limits ownership.

💡Buying

Buying involves purchasing a car, either by paying the full amount upfront or through financing over several years. The script compares buying with leasing, emphasizing that buying a car provides ownership at the end of the term. While buying may have higher monthly payments, it is portrayed as a better long-term financial decision, especially if the buyer intends to keep the car for many years.

💡Depreciation

Depreciation is the reduction in a car's value over time. The video explains that leasing payments primarily cover the car’s depreciation, meaning the lessee is paying for the drop in value during the lease term. For example, if a car drops from $30,000 to $20,000 over 3 years, the lessee is essentially paying for that $10,000 loss in value.

💡Residual Value

Residual value refers to the car's estimated value at the end of the lease term. The video explains that this value is important because lessees can choose to buy the car at this residual price once the lease ends. For instance, a car with a residual value of $20,088 may be bought for that amount after a 3-year lease.

💡Finance Charge

A finance charge is the interest paid on the loan or lease of the car. The script discusses how leasing includes finance charges set by the car dealership's bank, influenced by economic factors such as interest rates. These charges affect the overall monthly payment for both leasing and buying.

💡Down Payment

A down payment is an upfront sum paid at the start of a car lease or purchase. The video uses an example where a $3,000 down payment is made on a Toyota RAV4 Hybrid. This payment helps reduce the total amount financed or leased, affecting both the monthly payments and the overall cost of the vehicle.

💡Interest Rate

The interest rate is the percentage charged on the borrowed amount during financing. In the video, the speaker uses a 6% interest rate to calculate monthly payments for buying a car. Interest rates can vary based on the buyer’s credit score and broader economic conditions, impacting the total cost of ownership.

💡Monthly Payment

Monthly payments refer to the regular installments made during a car lease or loan. The video compares the lower monthly payments of leasing to the higher ones of buying, illustrating the difference using the example of a Toyota RAV4 Hybrid with $394 per month for leasing and $551 per month for buying.

💡Maintenance

Maintenance involves the cost of keeping a car in good working condition. In the video, leasing is described as advantageous for covering maintenance because many leases include warranties for the duration of the term. Buyers, on the other hand, may have to bear these costs after the warranty expires.

💡Ownership Costs

Ownership costs encompass the total expenses related to owning a car, including depreciation, maintenance, and taxes. The video breaks down the cost of owning versus leasing a Toyota RAV4 Hybrid, showing that ownership tends to be more cost-effective over time, especially if the car is kept for several years.

Highlights

Leasing is generally cheaper on a monthly basis than buying a car.

When leasing, you pay for the depreciation of the car's value during the lease term.

Leasing involves paying interest or finance charges, taxes, and fees.

A three-year lease for a Toyota RAV4 hybrid would cost about $17,180 total.

At the end of a lease, you have the option to buy the car at a set residual value.

Buying the car outright for three years would cost about $34,176.

A five-year financing option for the same car would result in a total payment of $36,250.

At the end of five years, you can resell the car for around $24,885, lowering the overall cost of ownership.

When comparing the costs of leasing versus buying, owning a car is generally more economical over the long term.

Leasing is better for someone who wants to drive a new car every few years and keep lower monthly payments.

Buying is better for someone who wants the best financial option and doesn't mind driving the same car for many years.

Leasing might be better for certain luxury or sports cars that have high maintenance costs and depreciation.

Leasing includes mileage limits, and exceeding them can incur additional fees.

Business owners may benefit from leasing as they can write off some lease payments as business expenses.

One disadvantage of leasing is that at the end of the lease, you don’t own the car and might have to pay additional costs if you want to buy it.

Transcripts

the question of leasing versus buying a

car comes up all the time and depending

on who you talk to can be rather

controversial what is the better

financial decision though in order to

figure that out we need to figure out

what the total cost of car ownership is

per year in order to get a fair

comparison between Leasing and buying a

car it sounds pretty simple but there

are a lot of factors that we want to

break down in today's video in addition

there's also intangibles that you might

want to consider before buying versus

leasing a car such as depreciation

maintenance plans and just the feeling

of overall ownership costs these days

can vary quite widely as the current

autol loan interest rates are higher

than ever bringing the average monthly

car payment of a new car in America to

almost

$729 per month if you do want a cheaper

monthly payment though people usually

tend to lease their cars in this

situation so I don't know if you know

this already but when you are leasing a

car you're basically renting the car for

a set period of time usually about 3

years is the standard term and at the

end of 3 years you need to give that car

back to the car dealership during those

three years you're making monthly

payments on the car and those monthly

payments cover four different things the

first is depreciation since cars lose

value over time when you lease a car

what you're essentially doing is you're

paying for how much the car's value goes

down during the time that you're leasing

it for example if a car is worth $30,000

at the beginning of the lease and then

$20,000 at the end of the three-year

lease term you're essentially making

payments on the $10,000 loss in value

over that lease term number two your

monthly payment also covers a interest

or a finance charge car dealership

leasing the car to you is lending you

the car value for the leases term so

you're going to pay a finance charge for

this and this is usually determined by

the car dealership's Bank as well as

broad economic factors like the current

interest rate your monthly payment will

also cover any taxes associated with the

lease that's Factor number three as well

as any fees with the lease that's number

four leasing then is usually cheaper on

a monthly basis than buying a car and

financing it because leasing you're only

really covering the difference in loss

and value of depreciation and you're not

basically financing the entire value of

the car right then so let's use an

example here because that usually

illustrates it a little bit better say

we wanted to buy this Toyota Rav 4

hybrid which suggested retail price is

$31,385 say you want to lease it for 3

years and pretend you make a down

payment of $3,000 on this car which is a

pretty typical ask for a three-year

lease term all right so the term is 3

years you'll get 12,000 m a year and at

the end of the lease you'll be able to

buy this car outright from the dealer

for their set residual value of

$2,088 if you're wondering how I got

this number I just looked it up on the

edmonds.com car forums where you can

find the residual value of almost any

car you're looking at buying the

information is typically crowdsourced

from other car dealers all across the

country and usually just requires a

Google search you can see this post that

I found from a couple months ago this

says that the RF 4le hybrid that we were

looking at has a residual value of 67%

so I simply just multiplied 67% times

our purchase price of

31475 that means the total amount that

you're going to pay on on your car lease

over 3 years is the $3,000 down payment

as we talked about before as well as all

of the payments added together so that's

$394 a month for 36 months that brings

our grand total to $1

17,18 to lease the car for 3 years

that's how much we would have paid in

total and at the end of 3 years you're

given the option to buy the car outright

for

$2,883 years you buy the car outright

that way we can compare the cost of

leasing to the cost of buying in terms

of total cost cost of the vehicle that

means you're able to own your Toyota Rav

4 hybrid after the lease ends for a

total of $ 38,2 72 okay let's go ahead

and run the numbers for buying the car

but before we do that make sure to

subscribe to this channel if you haven't

subscribed already I'm planning on

releasing a bunch of videos in 2024

about financial topics just like this

one and subscribing is free and you can

always change your mind later even

though secretly I hope you don't

actually change your mind and you just

never unsubscribe for my channel forever

I'm just kidding you can do what you

want but let's talk about buying now all

right so when it comes to buying you'll

typically make a down payment on the car

and then you're going to finance the

rest of the car over that term whatever

you choose and the terms are usually a

bit longer usually five or 6 years what

that means is that you're taking on a

loan with the financial institution

that's usually provided to you by the

car dealership and you're making

payments on that loan so principal and

interest for the entire life of that

loan until you pay off the car your

interest rate is going to vary

differently depending on what the

economic factors are at the time so what

the interest rates are in the United

States as well as what your personal

credit score is with an excellent credit

score these days usually the interest

rates for an auto loan are between 5 and

6% so we'll use 6% in today's video now

of course if you are watching this in

the future and interest rates have

comeone down what you can do is just

Google the fact you can just Google this

average car loan interest rates and the

month and the year that you are

currently in and you'll probably get an

average estimate of what your interest

rate is going to be all right so using a

6% interest rate again the car that

we're looking at is31

$1,475 we'll also make a down payment of

$3,000 and let's pretend that we're

going to finance this vehicle for 5

years or 60 months that means our

monthly payment here is going to be

$551 a month we'll be paying that for 60

months and at the end of 5 years the

Toyota RF 4 actually keeps its value

quite well and only depreciates 21%

according to car edge.com that means at

the end of five years we can resell this

car for

$24,885

of course this is the toyoto Rav 4 on

car.com it might not be the hybrid

version so if we want to take a more

conservative approach we can say that we

can resell the car for maybe 24,000 or

23,000 it doesn't really matter as long

as you are comfortable with your

estimate and you are playing around with

that calculation for your own situation

in any case let's continue with our

example that means the total cost of car

ownership for this Toyota RAV for hybrid

is going to be our down payment which is

$3,000 plus the monthly payments of $550

$51 time 60 months and that's going to

give us a grand total of

$36,250 hypothetically sell this car for

the market value of

$24,885 that means your total cost of

car ownership for the past 5 years has

been the total price that you paid

$36,800 over 5 years all right but I

know what you were thinking right now

which is that Humphrey you just compared

a 5-year financing term to a three-year

lease term you can't compare these two

these are not Apples to Apples

comparisons and I definitely agree with

you so let's do the same numbers for a

3-year financing period if we were to

buy the car outright over 3 years we

would still make the same down payment

of $3,000 but our monthly payments would

now be

$866 for 36 months that brings our grand

total to buying the car in 3 years to $

34,1 76 you can see here that if you

finance it for just 3 years the overall

total cost of the car is a lot lower

because you're not paying that much in

interest however the monthly payments

are a lot less manageable so here's what

a full table of what the total cost

looks like of this particular car across

financing and Leasing and the different

terms so if you buy the car for over 3

years 34,1 76 if you buy the car over 5

years it's going to cost you

$36,988

something2 but now what I want to do is

actually compare the cost of car

ownership over a certain amount of time

especially if you just want to return

the car after three years so in this

hypothetical example we are going to

return the car after we leased it for

three years figure out what the costs

are for that as well as if we bought the

car we're going to buy the car and then

sell the car after 3 years and see how

much it costs us there in the buying

scenario if we use the three-year cost

that means the total cost of the car is

$34,100 your total cost of car ownership

is going to be

$852 over those 3 years and leasing

scenario we only put our down payment

down so that's $3,000 and our monthly

payments of $1

4,184 over3 years so $1

17,18 was spent on the lease over 3

years and then you turn the car back in

that is a huge disparity right like

$117,000 or more to basically lease a

car for three years or $88,000 to own

the car for 3 years and then sell it off

we'll talk about how we're going to

resolve that in a second here but there

is one huge reason we actually need to

consider here when we're talking about

this situation and that is that often

times the residual purchase price of the

car is going to be a lot lower than the

market value that you're going to be

able to get for that same used car in

the market remember in our earlier

example when I said you could lease the

car for 3 years and then you had the

option to buy it for

$2,088 but if you were to own the car

outright for three or 5 years you could

sell the car for close to $24,000 or

even $26,000 so what gives there the

reason this is happening is quote

because today's used car market has a

lot of demand that means your car's

resale value is almost guaranteed to be

much higher than your residual value in

other words you'll be able to buy your

lease for much less than you would be

able to sell it for so each car is going

to be a little bit different depending

on the used car market at the time now

to get a fair Apples to Apples

comparison of leasing costs versus

buying costs after you don't have the

car anymore let's pretend the person who

leased the car actually bought the car

outright got the residual value price

that they got 2188 and then resold it

for $226,000 or so that means that

particular person would have paid $ 38,2

72 for the total Car Plus the lease and

then they got back $

26,120 bringing their total cost of

leasing to

$1,148 so here's what that looks like on

a yearly basis in this table right here

if we bought the car it would have cost

us $852 total and if we leased the car

it would have cost us

$2,148 total that means the car

ownership per year cost for this

particular situation was 2684 per year

in terms of buying or

$4,049 per year in terms of leasing So

based on the math right here for this

particular car it's definitely more

economical to buy the car rather than to

lease the car in this situation and the

big takeaway for this video is that for

most people and most cars it's going to

be more financially economical or

financially prudent to buy a car

especially if you're planning on owning

the car for a long period of time over

five six or seven years of course this

is going to depend on a lot of things

like depreciation and residual value as

well as what you can get for it in the

used car market if you're wondering how

it's going to work out for you and your

particular making model you need to run

the numbers yourself there are going to

be some scenarios in which there are

cars that are much better to lease than

to buy for example let's pretend that

you wanted to drive a Range Rover or

some sort of sports car that has high

maintenance costs and a lot of

depreciation these are sometimes better

to lease because you can drive a luxury

car for a lot cheaper than owning it out

right if it has maintenance issues it

will likely be covered by the dealer and

often times you are only paying tax on

the depreciated car amount rather than

the least car amount leasing a car might

also depend on your personal situation

if you're the type of person who wants

to lease or try a new different car

every single 3 years and you're really

not that diligent in taking care of your

car perhaps leasing is a better option

for you leasing may also be good for

someone who runs a business and needs a

car as part of that business and is able

to write off some of those payments

netting them some savings over time the

other great thing about leasing is that

you generally don't have to worry about

car maintenance at all usually they have

dealer warranties for whenever you're

leasing the car for the entire term so

that if they're is an issue you can just

bring it to the dealership and they will

fix it for you but with leasing also

comes some disadvantages as well often

times there are mileage limits so if you

get a lease that can only allow you to

drive 10,000 m a year if you go over

those 10,000 miles you generally have to

pay 10 cents or 25 cents per mile that

you go over of course when you buy the

car you don't really even have to worry

about that you can put as many miles on

the car as you need to and you just

generally don't have to worry and you

have that peace of mind another

disadvantage of leasing in my opinion is

that if you get into a lease for 3 or

four years and you don't like the car

after let's say 6 months or 12 months

you're generally stuck in that lease

unless you're willing to pay a early

termination fee and that can actually be

pretty hefty and lastly I think one of

the disadvantages of the lease is that

at the end of the lease term you don't

have a car to show for it and you

generally have to be expected to Pony up

and pay the entire amount if you want to

buy it out right so what I want to sum

up here is that buying is probably

better for somebody that fits the

following four criteria number one

you're probably someone that wants the

best financial option in most situations

and then number two you don't mind

driving the same car for 5 8 10 12 15

years number three you actually like the

sense of ownership and that makes you

proud and gives you some peace of mind

and number four you don't really want to

have to deal with the limitations that a

lease will put on you leasing is

generally better for somebody who fits

the following criteria so number one

they want a new car every 3 or 4 years

number two you're somebody that wants to

drive more of a car for a lower monthly

payment so maybe you're eyeing a sports

car you could generally get a lower

payment for that than if you were to

finance it with the dealership number

three leasing is better for you if you

don't think you're going to go over the

mileage limits like let's say you know

that you don't drive that often then

perhaps leasing is a good option and

number four leasing is pretty good for

those business owners who are able to

write off a portion of their lease

payments from their business all right I

hope this video was helpful if you did

enjoy it make sure to subscribe to this

Channel and check out my next video on

cars that I'll leave up right here for

you guys and I will see you guys in the

next video all right

[Music]

peace