Buy or Lease



In concept, there are very good reasons to lease a vehicle.  The best of these reasons is that you never get into a financial condition that is referred to as being "upside down".  Upside down is a condition where you owe more on your loan that your vehicle is worth.  You can still end up paying additional money when you turn in the vehicle at the end of the lease which the same problem with a different label.  The reason that buyers get upside down is because their vehicle depreciates faster than they are paying off the loan.  The reason that you do not get upside down on leases is that the lease payment includes the depreciation.  You are paying for the depreciation every month rather than when you turn the vehicle in.


Leasing plans are changing daily, and they vary widely from state to state as well as on a smaller scale from dealership to dealership.  Leases are becoming more popular, and unfortunately, more creative.  The more creative they get, the more entangled they become.  Somebody out there has a good lease plan, but more common are plans where the dealer wins and the customer loses (which is why these plans are so widely advertized).  Monthly payments are lower, but the initiation fees and the payout at the end of the lease more than make up for it.  You are charged for additional miles and any little thing that varies from new vehicle condition.


Then there are the newer plans that are really purchases but have the lower monthly payments of leases.  At the end of the initial finance period, you have to shell out a “balloon” payment, usually on the order of 1/2 to 2/3 of the initial price of the vehicle.  More about this later.


Remember that this website attempts to be as objective as possible, but without knowledge of the future, objectivity becomes difficult.  It is better to be pessimistic about what a vehicle will end up costing.  That way, if you get more than you planned, it is gravy.  More often than not, pessimism tends to be the more accurate predictor of the future when it comes to depreciating assets such as vehicles.


Bottom line:  If you can accurately predict how many miles you will drive over the lease period and what the vehicle will be worth at the end of that period, you can make a decent guess as to whether to buy or lease.  Suppose that you are looking at having a vehicle for three years.  Since most costs between purchasing and leasing are the same, such as insurance, operating costs, and maintenance, there are only a few cost factors that should be figured in to be able to compare these two possibilities.


For a purchase:


  1. Take the total of three years of monthly payments (plus taxes, title, and license)


  1. Subtract what you would get back from selling the vehicle.


  1. Add what you will have to shell out to pay off the loan.


The total of these three equals the total purchase related costs.


To get what the vehicle will probably sell for, consult the National Automobile Dealers Association's NADA Official Used Car Guide for the value of a three year old version of what you are buying.  And be realistic.  The NADA book can be viewed at your local bank, credit union, or dealer.  The NADA book at the book store is not a really good check, but it is better than looking through the newspaper.  The book store version is the consumer version, which displays what people may ask for a vehicle.  The one at the bank has data on what vehicles of that description actually sold for last month in your region of the country.  The NADA site that you can view on the internet (at is the same as the consumer version.  When viewing the bank’s NADA book, the wholesale or trade in value is what you will probably get if you sell your vehicle yourself.  Bank loan value will usually be about what the dealer will give for a trade in.  The trade in price that the dealer will offer will consist of the value of the trade in (bank loan value) plus the discount he offers off of his new vehicle.  That makes it sound as though he is offering you more for your vehicle.  (More about dealers later.)


For a lease:


  1. Start with the initial leasing fees.


  1. Add the total of three years of monthly payments.


  1. Ask the leasing company what they will charge up front plus what they will charge at the end of the term for things like extra mileage, door dings, worn tires, windshield chips, etc.  Add your guess for these things.


The total of these three equals the total lease related costs.


Compare the purchase total to the lease total, and you have your answer.  What’s the answer?  Well, it is most probable that the lease company will profit from a lease.


Note that the balloon purchase is not offered here as a possibility.  Although in theory, this could be a possible way of purchasing, your actual cost to do this kind of purchase is much higher than for a normal purchase.  The way it works is that you buy a vehicle and you make very low monthly payments, on the order of lease payments, which are normally around 60 – 70% of what purchase payments would normally be.  The idea is that you get into a car for lower monthly payments for around three or four years.  At the end of that time, a very large payment, on the order of 1/2 to 2/3 of the purchase price, would be due.  If you cannot pay it, the vehicle gets repossessed, you lose your credit rating, and you still owe the money.  Even if you sell the vehicle before the balloon payment comes due, the money you get from the sale of the vehicle usually will not cover the balloon payment.  You are supposed to think that after three or four years, you would want to sell the car anyway, but the real problem is that the car will probably be worth less than what you could get for it at that time, so after you sell it, you would still have to add several thousand dollars to the sale price to make the payoff for the car (the balloon payment).  This would put a lot of people in financial trouble.  The main reason that you would probably have to add so much money to the sale price to make the payment is that even though you make small payments, the interest accrues according to the amount of the loan that is not paid off.  Therefore you are paying far more interest than you would have if you had purchased the car on a normal 60 month loan.  This means that most, if not all, of your monthly payment goes to pay the loan interest, and at the time the balloon payment is due, you still owe much of the original principal (ie, the original cost of the car) because the car will probably have depreciated at the greatest rate of its useful life.