Leasing vs buying a new car - at what point does the cost break even?

[Kitsune]

I'm SURROUNDED by people who refuse to buy used cars, Husband included, ARGH. For the record: I won the battle on getting a small, cheap, gas-efficient car within our means that we could have without payments, and only having ONE car. He won the 'but it's new' battle (which, at the time, was about 3K more than a 2-year-old Honda Fit with 50K KM on it, for some reason, so it wasn't a big loss). I share the opinion that letting someone else swallow the depreciation is the smarter financial choice, but that's not actually an option here for marital harmony (or giving advice to my parents, which is the secondary reason I'm writing this). We're going to need to get another car in about a year and a half, based on usage and lifestyle. I wanna know what my best arguments are. ;)

To be clear: I am NOT looking for the 'best' advice (buy a good-condition well-maintained used car, I freakin KNOW that's the best option), I am looking for the best WORKABLE advice (for people who are ONLY willing to consider new cars, what's the best option).

My SPECIFIC question: at what point does a cheap lease become a better deal than buying?

Taking the Honda Fit, Quebec prices (because that's immediately applicable for me, so hey!):
New car: 16,441$ (as per the honda.ca website) (let's disregard the cost of financing for the moment)
Lease: dealership is advertising 44$/week, so approximately 190$/month, on a 48-month lease, for a total of 9152$

Advantage of buying is obviously that at the end of it you still have a car that's worth something/can be used/has no monthly payments. However, at those prices, a 4-year-old fit with 2K km per month (so 96K km) seems to be worth not terribly much more than the amount left over on the 'new' car (about 1.5K).

Question: is there a rule of thumb for cheap lease vs car price?

[405programmer]

Just some rough back of the envelope numbers might help.

If you are looking at buying a 2016 Fit then and keeping it 4 years we can look at the prices of 2012 model Fits right now to get a feel for what your car might be worth in 4 years. According to VMR (is this a good site?) http://www.vmrcanada.com/used-car/values/2012-Honda-FIT.html you're looking at somewhere between 7,500 and 10,000 for the sale value of your car. We can run some quick numbers with this.

Buy outright and worst case value:
7,500 (value of car in 2020) - 16,441 (cash cost now) = -8,941 (total loss)

Buy outright and best case value:
10,000 (value of car in 2020) - 16,441 (cash cost now) = -6541 (total loss)

Lease for 4 years:
-9152 (total loss)

So the simple math points that buying a car is the better option and if you like to take care of your cars then it's the best option by about 2,600! There are many more things to consider like the cost of financing, the opportunity cost of your down payment (or lack thereof) and if you have to pay for any rock chips / door dings at the end of your lease. I know I had a friend who though leasing was a great deal until he had a 1000 dollar bill at lease end for relatively minor cosmetic damages over his 3 year lease term.

I would encourage you to keep looking at the details but quick and dirty math says buy!

[Kitsune]

Yeah, quick and dirty math says buy (assuming no financing costs and assuming no opportunity costs).

BUT if the cost of the lease is 40$/week instead of 44$/week (hypothetically), then the total cost becomes 8320$, which is less lost than the worst case scenario of buying you listed.

So, clearly, there are circumstances where leasing isn't the WORST idea.

(Disclaimer: my husband is... not financially minded, and is typically happy to let me tell him where the money makes sense, assuming I can explain it simply. He's all like 'oh, look, that's affordable, we can do that next year!' and I'm basically looking for the numbers I need to be like 'IF the cost per week/month is under X then that's a good option, otherwise we stand to lose Y at the end of 4 years and would be better off doing Z thing instead for the following reasons'.)

[daverobev]

I'm SURROUNDED by people who refuse to buy used cars, Husband included, ARGH. For the record: I won the battle on getting a small, cheap, gas-efficient car within our means that we could have without payments, and only having ONE car. He won the 'but it's new' battle (which, at the time, was about 3K more than a 2-year-old Honda Fit with 50K KM on it, for some reason, so it wasn't a big loss). I share the opinion that letting someone else swallow the depreciation is the smarter financial choice, but that's not actually an option here for marital harmony (or giving advice to my parents, which is the secondary reason I'm writing this). We're going to need to get another car in about a year and a half, based on usage and lifestyle. I wanna know what my best arguments are. ;)

To be clear: I am NOT looking for the 'best' advice (buy a good-condition well-maintained used car, I freakin KNOW that's the best option), I am looking for the best WORKABLE advice (for people who are ONLY willing to consider new cars, what's the best option).

My SPECIFIC question: at what point does a cheap lease become a better deal than buying?

Taking the Honda Fit, Quebec prices (because that's immediately applicable for me, so hey!):
New car: 16,441$ (as per the honda.ca website) (let's disregard the cost of financing for the moment)
Lease: dealership is advertising 44$/week, so approximately 190$/month, on a 48-month lease, for a total of 9152$

Advantage of buying is obviously that at the end of it you still have a car that's worth something/can be used/has no monthly payments. However, at those prices, a 4-year-old fit with 2K km per month (so 96K km) seems to be worth not terribly much more than the amount left over on the 'new' car (about 1.5K).

Question: is there a rule of thumb for cheap lease vs car price?

You just need to know the buyout price at the end of the least, vs the expected sale price.

Total cost of leasing + buyout vs cost to buy.

Remember financing AND leasing have a cost; I believe with leasing you are "borrowing" the whole cost of the car until you return it.

Also, with Hondas, they just don't depreciate that much. A year ago I never thought I'd get a new car. I went and looked at used, but couldn't find what I wanted *that had been rustproofed*. So we ended up getting new (not Honda, mind - waaay too expensive). Mind you, we bought 'end of year blowout' price stuff. Shrug. Hopefully the cars will last a good long time.

[405programmer]

Hey if you're approaching your finances with an analytical eye then you're doing it right!

That's a great point about the buyout cost coming into play. Otherwise the lease option starts to look the best if you only look at the cash cost of using the car. Another thing is flexibility. Some leases have penalties if you want to break the lease early. If money becomes tight in 2 years and you want to free up some monthly cash you can just sell the car within a few weeks and trade down to a reliable used vehicle.

[haschen]

(Disclaimer: my husband is... not financially minded, and is typically happy to let me tell him where the money makes sense, assuming I can explain it simply. He's all like 'oh, look, that's affordable, we can do that next year!' and I'm basically looking for the numbers I need to be like 'IF the cost per week/month is under X then that's a good option, otherwise we stand to lose Y at the end of 4 years and would be better off doing Z thing instead for the following reasons'.)

My husband is the same, but to much greate extent. Recently he announced that we will be buying BMW X5M for about 90k. For the sake of our marriage i had to agree on that, but he was ready to buy used 1year old car as a compromise. But now, bmw announced that they re-doing this model, so we are waiting for the next year to get brand new carl aggghhh. I cant argue with him any more, but im definately cant imagine spending that much money on a car. Im stacked.
All these sweet marriage perks we have to deal with ...

[Dicey]

Was there ever a lease anywhere that wasn't rife with hidden costs and Gotchas? I kinda doubt it, but I know others here will have tales to tell.

[rothwem]

I think its important to know how a lease is calculated before you actually do a lease.  There's a few factors that are really really important.

-Capital Cost: The price of the new car
-Money Factor: Basically the interest rate.  Multiply the money factor by 2400 to get the APR.
-Residual: What the car company thinks the car will be worth at the end of the lease. 

So basically, a lease is buying (at the capital cost) a financed car(at the rate mentioned in the money factor), where the car company has already agreed to buy it back at an agreed on price (the residual) at the end of the lease term.  They take the capital cost, subtract the residual, carve up the calculated depreciation and add interest to it. 

The residual is usually not negotiable, but the capital cost and the money factor are, so negotiate the crap out of them. 

Never put any money down on a lease.  If you wreck the car the next day after you put down $5000, you don't get that money back, its gone for good, unlike if you buy a car. 

Overall, I'm not wild about leasing, but some people seem to like it because they get a shiny new car every few years.  I might lease an electric car somewhere down the line too, because the depreciation is unpredictable due to changing technology, but the price has got to be right. 

[Dicey]

^^This^^, plus, the mileage overage charges and the fees for any damage the dealer can find with a magnifying glass. What is the constant worry about how much you drive it or what every little nick or scratch is going to cost you at turn in worth? Who needs the stress for the privilege of driving a shiny new car?

I understand that leasing an electric car might be currently not a bad deal while the technology is still new and people are hesitant to adapt, but over time the dealer is always going to be in dogged pursuit of as much of your wallet as they can grab. Why knowingly ante up to a rigged game?

[Easye418]

(Disclaimer: my husband is... not financially minded, and is typically happy to let me tell him where the money makes sense, assuming I can explain it simply. He's all like 'oh, look, that's affordable, we can do that next year!' and I'm basically looking for the numbers I need to be like 'IF the cost per week/month is under X then that's a good option, otherwise we stand to lose Y at the end of 4 years and would be better off doing Z thing instead for the following reasons'.)

My husband is the same, but to much greate extent. Recently he announced that we will be buying BMW X5M for about 90k. For the sake of our marriage i had to agree on that, but he was ready to buy used 1year old car as a compromise. But now, bmw announced that they re-doing this model, so we are waiting for the next year to get brand new carl aggghhh. I cant argue with him any more, but im definately cant imagine spending that much money on a car. Im stacked.
All these sweet marriage perks we have to deal with ...

Beautiful car, my SVP of Sales drove one. 

For me, cars really top out at mid luxury, I don't think I will ever spend more than $30k-$35k.  Only reason I would pay that much is for a Lexus so I can drive it into the ground.

[haschen]

My husband is the same, but to much greate extent. Recently he announced that we will be buying BMW X5M for about 90k. For the sake of our marriage i had to agree on that, but he was ready to buy used 1year old car as a compromise. But now, bmw announced that they re-doing this model, so we are waiting for the next year to get brand new carl aggghhh. I cant argue with him any more, but im definately cant imagine spending that much money on a car. Im stacked.
All these sweet marriage perks we have to deal with ...

Beautiful car, my SVP of Sales drove one. 

For me, cars really top out at mid luxury, I don't think I will ever spend more than $30k-$35k.  Only reason I would pay that much is for a Lexus so I can drive it into the ground.

I wish we could stop at 35K, that would a breeze

On the original topic, it doesn't make any sense to lease cheap car, as in US you don't get any Tax advantages. In Australia lease would be payed out before Tax(including maintenance, and gas), so that would be totally different story.

my understanding is, the lease is semi worth it if you want to buy expansive car, that depreciate quickly and is hard to sell in the end. Plus your monthly payments are much less then for the loan.

Also, keep in mind, that leasing interest rate is usually higher then for the loan (at least from my personal experience with BMW)

Good luck with this, I know exactly how it feels like..

[worms]

Not sure about the Canadian or US market, but some lease deals elsewhere include maintenance, tax and insurance, so you would need to add any of these extras into the maths to get a full comparison of overall costs.

Leasing is not for me and I am deeply concerned about where it is taking the overall car market - it has allowed a dis-association between car values and affordability.  It is also influencing vehicle design and build-quality in ways which reduce the year 1-4 costs at the expense of the longer-term life expectancy of the vehicle. 

I suspect the next generation will have no choice but to accept monthly vehicle lease costs and software licenses, as new technology takes over.  Outright ownership may well become a thing of the past.

[Goldielocks]

Not sure about the Canadian or US market, but some lease deals elsewhere include maintenance, tax and insurance, so you would need to add any of these extras into the maths to get a full comparison of overall costs.

There are some cases for business car purchases, where the tax deductions allowed, and ease of maintenance plans (versus paying someone to worry about it), guarantee of selling it in x years, and ease of paperwork, makes sense over buying new.   It still does not beat buying used, but compared to buying new, then yes.

The only other time is when there are heavy manufacturers' discounts for leasing.

[NoStacheOhio]

Not sure about the Canadian or US market, but some lease deals elsewhere include maintenance, tax and insurance, so you would need to add any of these extras into the maths to get a full comparison of overall costs.

Leasing is not for me and I am deeply concerned about where it is taking the overall car market - it has allowed a dis-association between car values and affordability.  It is also influencing vehicle design and build-quality in ways which reduce the year 1-4 costs at the expense of the longer-term life expectancy of the vehicle. 

I suspect the next generation will have no choice but to accept monthly vehicle lease costs and software licenses, as new technology takes over.  Outright ownership may well become a thing of the past.

On-demand, autonomous car service is probably down the road. For MMM-inclined people, that would probably be a benefit. Car when you need it, no car when you don't. No capital sitting idle in your garage.