Leasing vs Buying a Car: Which is ACTUALLY Cheaper in 2024?
Summary
TLDRThis 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
🚗 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.
💸 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.
🔧 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.
Mindmap
Keywords
💡Leasing
💡Buying
💡Depreciation
💡Residual Value
💡Finance Charge
💡Down Payment
💡Interest Rate
💡Monthly Payment
💡Maintenance
💡Ownership Costs
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
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