If you are trying to figure out whether to lease or buy a car, you need to do the math each time. Depending on the year and the health of the auto industry, the terms can be quite attractive or can be to your detriment.
Having been in the investment business my whole life, I struggle with investing in any asset that does not appreciate or at least retain its value – especially an asset that carries as a high price tag as an automobile. The vehicle is often a necessity, but the investment loses its value on day one and eventually becomes worthless. For those who follow this ‘mantra,’ it is almost always best to buy and hold for as long as possible. In other words, drive the car until it cannot go any longer. However, owning a nice car – especially a newer one – can bring a lot of joy, and so there are personal tradeoffs between those choices.
For those who enjoy buying a new car every three years or so, leasing is an excellent option. A recent article in The Wall Street Journal, “The New Math of Car Leasing,” does some of the legwork for you on the choices.
Leasing can appear quite attractive as the payments are often less than if you were to take a loan on the car. This should be no surprise as when you lease, you never own the car and have to give it back, whereas if you take out a loan, at the end of the period, you own the car. However, since automakers need more used cars to sell, and those generally come from people turning in their cars after the leases expire, they have made leasing more attractive. The interest rate on leases is now down to 2.2 percent in many cases as compared to a loan rate for a purchase 4.6 percent.
If you are looking to lease and don’t want to have the car more than three years, leasing is quite compelling. In addition, by leasing, you do not tie up your money in the car. Instead, you can take the funds you would have used for a purchase and invest them.
For those of us seeking to buy and hold for a longer time period, one new option from car dealers is a five-year lease. For consumers, this translates into lower monthly payments and acts a bridge between a three-year lease and owning a car.
Now suppose you have enough cash to buy a car outright; then you have the decision as to whether to buy with cash or to take out a loan. If you think you can get a better return on those funds than the loan rate, then you might want to consider taking the loan and investing that cash. However, don’t go get a loan at 4.2 percent and then leave the cash in a money market account earning 0.25 percent.
Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisers before investing.