Deciding between leasing and buying a new car is a significant financial consideration. When you acquire a new vehicle, whether through leasing or purchasing, you immediately encounter the steepest part of its depreciation curve. While the lease-versus-buy decision has nuances, the primary financial impact occurs simply by driving a new car off the lot. This is why some savvy car enthusiasts look for “fart cars”—vehicles with some wear and tear but still holding residual value—as a more economical option.
Many perceive “savings” by opting for older vehicles. Similarly, at the end of a lease, a lessee might consider buying the vehicle at its residual value and continuing to drive it. This can indeed appear to save money compared to entering into a new lease agreement immediately.
If you finance a vehicle from the outset, the financial benefits are maximized by keeping the vehicle for more than three years. Trading in a three-year-old financed car for a new model and loan often negates potential savings.
Ignoring electric vehicles (EVs) for a moment, the simplest approach to decide between leasing and buying is to compare the money factor (MF) of a lease against the annual percentage rate (APR) of a car loan. If the MF is significantly subsidized—around 0.0015 or less in today’s market—and loan subventions are absent, leasing becomes the more financially sound choice due to the lower implied interest rate.
When the MF and loan APR are comparable, leasing often remains advantageous. Leases typically involve lower monthly payments because you’re not paying down the principal. While loans build “equity” in the vehicle, this equity can be viewed as tied-up capital with opportunity costs, as highlighted by financial discussions on platforms like Leasehackr. The cash invested in vehicle equity could potentially be used or invested more profitably elsewhere.
A key advantage of leasing is optionality. Lessees retain the option to purchase the vehicle at any point, effectively converting the lease into a financed purchase if it becomes beneficial. Conversely, they can return the vehicle at lease end if the residual value is unfavorable. Those who finance a purchase, however, are always exposed to depreciation without this exit strategy.
The value proposition of leasing hinges on this flexibility and reduced opportunity cost, making it a valuable tool for the informed consumer. However, if the MF is excessively high, as can be the case with luxury vehicles like a G-Wagon, leasing becomes less attractive. Conversely, extremely low MFs make leasing a very compelling option.
For EVs, the $7,500 federal tax credit initially made leasing appear favorable due to its pass-through to the lessee. However, some automakers offset this benefit with inflated money factors in their lease programs, as seen with brands like Mazda and Volvo. In such cases, a strategy of leasing to capture the credit and then immediately buying out the lease with a loan can be optimal.
Furthermore, the rapid depreciation observed in some EVs, such as the Mercedes-Benz EQS, where values have plummeted nearly in half, underscores a significant risk in EV ownership. Automakers sometimes subsidize lease residuals on models prone to high depreciation, like the EQS and Audi e-Tron, making leasing a much safer bet than buying and being directly exposed to such depreciation.
In conclusion, the lease-versus-buy decision for new vehicles primarily boils down to a comparison of the money factor against the loan APR and how residual values might impact your specific situation. To truly maximize savings, consider operating a vehicle well beyond the typical lease term. Resources like the LH calculator can further assist in comparing lease and buy scenarios, though they may not fully account for opportunity costs or long-term maintenance expenses.
