In today's low interest environment, is it generally more economical to buy or lease a new car? Assume above average to excellent credit and an average priced new sedan. I ran through a cost comparison in my finance class last week, but the numerical assumptions in the book were somewhat out of date. Any insights would be much appreciated!
EDIT: Would anything change if you buy a car with a high expected residual value?
It's my understand that leasing is never the better overall deal, with the possible exception of a person who would otherwise buy a brand new car every 2 or 3 years, and does not drive a lot of miles.
Note: in the case of a company car, Canadian taxes let you deduct the entire lease payment (which clearly has some principal in it) if you lease, while if you buy you can only deduct the interest, and must depreciate the car according to their schedule. This can make leasing more attractive to those buying a car through a corporation. I don't know if this applies in the US.
The numbers you ran through in class presumably involved calculating the interest paid over the term of the loan. Can you not just redo the calculation using actual interest and lease numbers from a randomly chosen current car ad? I suspect if you do, you will discover leasing is still not the right choice.
The most economical way is to save your money, and buy a 1+ year old used car with cash.
There are two reasons leases are generally a worse deal than buying.
First, inherent in the lease is the concept of trading in the car at the end of the lease term. As we all know, cars depreciate the most in the first year or two. By repeatedly leasing cars on short time frames, you own the vehicles during those most expensive years. Of course there's nothing stopping you from doing the same thing when buying (be it via cash or loan), but leasing builds in a schedule and encourages you to stick to it.
Second, it is easier for the dealer salesperson to hide things from the consumer in a lease contract. Most salespeople will try to get a car purchaser to focus on the monthly payment, or they'll four-box the purchaser, but even then there's only 4 numbers, and most consumers have a rough idea what they are and what they mean. But in a lease the numbers in question are renamed and obscured. "Price" becomes "capitalized cost". "Interest rate" becomes "money factor" and is divided by 2400, making it look really small and not easily translatable without a calculator or pencil and paper. "Down payment" becomes a capitalized cost reduction. There's a new concept "residual value."
Neither of those reasons change when interest rate is lower.
I love car leasing.
Not because I have ever leased a car, but because it produces a vibrant market of 3-4 year old cars with low mileage and strong seller guarantees.
All of the cars my husband's family, and now I, buy are about 3 years old and have around 30-40,000 miles, and are about half the price they would have been new. Total cost of ownership is much lower, despite repairs.
Unless you get to lease the car with pre-tax money and live in a really high tax country like Germany, buying "certified pre-owned" is going to put you ahead financially with a lower level of risk than buying private party. Private party is even less expensive, provided you can have a trusted mechanic check the car out before you're committed to it.
