How is leasing a car beneficial to the one who leases?

Question

They say that a car is a depreciating asset and so leasing a car works better than buying one. I heard this from folks and car salespersons. Although I understand the aspect of leasing cars meaning not having to spend on repairs, I don't understand how leasing is better.

It seems that leasing is fine if you assume that the car will run into repairs after the leasing period. But this may not be true always. I feel like I may be missing something here. Any analysis to help understand?

Clarification: I have heard from a few persons (sales and otherwise) that it mathematically makes sense on a depreciating asset. So their recommendation would be to just lease a car after another forever instead of ever buying it. So I am considering average leasing vs avg buying in installments (EMI) case, not extreme examples.

Answer 1

It's all about circumstances, but generally leasing a car only benefits the sales person. But there can be mutual benefits.

If you're the kind of person who must be seen in the latest model of car, then leasing can be great as every 2 years you just pass it in, collect the new model, pay a changeover fee and continue your payments as normal.

Or, in my situation, I had been saving for the downpayment on a car (at the time having no car at all and moving from Manhattan to suburban New Jersey where a car is a must), planning on financing the last 30% or so. Then an emergency, unexpected expense wiped out all but 10% of my savings.

That 10% I had left was enough for the downpayment on a lease. The monthly payment was higher than than I was planning on repaying had I got a loan, but it was that or an unreliable junker. So I got the car my family needed and that gave me 2 years to save enough to buy another car outright once the lease expired.

I was happy. My wife was happy. The dealer was happy. The leasing company was happy. Financially it was not the best, but as long as everyone walks away satisfied that was more important.

Answer 2

This depends on a number of factors. The idea of leasing is that there is some agreed upon amount of depreciation the asset experiences over the term of the lease, say 40% in 36 months. Rather than buy the whole asset, a car in this case, you simply borrow the car for the 36 month term and pay for the depreciation. Leases typically include some other fees like required gap insurance which may not be a terribly good deal, and the interest rate is typically much more vague than on a purchase arrangement.

If the vehicle is being used for a business it is easier to manage the taxes as your business doesn't own and as such doesn't have to depreciate the car; the business just deducts the lease payment.

In some states, like California, when you purchase a car you owe sales tax on the entire cost of the car, which can be a substantial amount. In a lease arrangement sales tax is paid on each lease payment. For more expensive cars that a person doesn't intend to own for more than a couple of years there can be a pretty substantial sales tax savings.

Buying things in cash is generally the best way to buy things. There are some situations where leasing cars is defensible once the person has made the leap to not buying a car in cash.

Answer 3

You can think of leasing a car for five years as "buying" the first five years of its life, plus "buying" the money for that purchase (that is, since you are making monthly payments rather than an upfront one, you are paying interest, or "buying" the time value of that money), and, if there's an option to buy it at the end, a premium for that. And then there's profit margin for the seller on top of that. So a lease is sort of a bundle of three things: a loan, a partial purchase, and an option. Deciding whether it's a good thing comes down to looking at those three things as deciding whether you value them at the price offered.

That it's a depreciating asset isn't much of an argument for it; it's not like the dealership isn't going to take the depreciation into account when they set their leasing prices. If anything, it's an argument against it, since the price of cars depreciate faster than their value. If we're comparing leasing a car every two two years versus buying a car and keeping it until it wears out, the latter is obviously less expensive. If we're comparing it to buying a new car every two years and trading in the old one, then leasing is more of a contender.

There can be specific circumstances that make leasing make sense, but it there's an attitude of disposablity for which leasing is both a cause and an effect, and that can be harmful to consumers.

Answer 4

It is about cash flow and taxes, mostly. And leasing is not really expensive - depending what you buy. I.e. a car producer will often subsidize the paymens. I pay very little for leasing which is not deprecation on both cars, the lease itself is just a couple of percent over the year. Seriously close to nothing.

In my case, my place of living makes it hard to deduct cars as business expense unless you have a financing operation going, preferably lease. Last car I bought cash and we spent 6 months arguing with the finance authorities.

Leaase the car and you do not only not have to spend all the money up front (moving CAPEX - Capital Expenses - to OPEX - Operating Expenses), i.e. I pay while I earn, I also suddenly have ZERO problems submitting the invoices. Significant difference. And yes, both cars actually are not intended to be replaced like that. I plan to buy them out after 5 years. Well, maybe I do replace them ;)

Answer 5

It depends on what contract you choose and how it will affect your tax deducts.

Counting from "zero" (where zero is the time you lease the car) the expenses may be equal or higher to cost of buying used car (with the plus side you are the owner of the car you bought). It's usually lower to money spend on new car in the same period of time (with the downside you are the owner of the car you bought and still face expenses).
But in my opinion you should look at lease in much more wider perspective. Take the time of lease and count the money you spend on transportation in same period as the lease will last BEFORE signing.

I'll give you my example. 2 years lease worth 16,620. With all expenses calculated in (insurance, inspection, extra costs made during recalls). And great (IMHO) service pack. So free towing, same replacement car etc. Now, in two years before the lease I've spend 15K on maintenance (so just to get the car moving). Plus around 2K on insurance, 300 on inspections, 1k on tires. With extra expenses on towing, lost time when car was in shop. Keep in mind that I was able to sell the car for the same price I bought so I didn't have loss on this (not always possible).

One could argue that next car wouldn't need so much money spend. But it's a gable. With leased car you are "protected". You don't have problems with a car. Leasing company does. With bought one (even new) you are the owner and you need to pay for anything extra that will happen.

Answer 6

To say that leasing is better than buying (or vice versa) is a meaningless statement without knowing the details of the contract. The first obvious question is price. If you can buy a certain model car for $20,000, or lease it for $10,000 per month, buying is surely better. Of course that's a ridiculous extreme, but that's my point. Without knowing the price in each case, you can't even begin to make a meaningful comparison.

In theory, you could compare by taking the cost to purchase, plus taxes and any expenses you would have over the life of the vehicle, minus the trade-in value; and then compare that to lease price times the number of months you expect to keep the car, plus any other expenses. The practical problem is that many of the relevant costs are unknown. I've seen lots of calculations for this sort of thing that blithely say "assuming that maintenance costs are zero ..." or some such very unlikely assumption.