Managing Your Money

When to lease a car instead of buying


If you’re in the market for a car, you might be considering whether you should lease or buy. The fall and winter months can be a great time to upgrade – manufacturers and dealerships are motivated to make room for next year’s models – giving them added incentive to offer deals. At a high level, it usually makes sense to lease a car if you plan to upgrade within a few years. However, regardless of whether you decide to lease or buy a car, do your homework first. Compare prices, watch out for hidden fees, and don’t be afraid to walk away if you don’t think you’re getting a fair deal.

Leasing a car

Lower payments, newer car
One of the biggest advantages is that you will likely be able to lease a better car than you might be able to afford if you purchased it. At a high level, the monthly lease on a vehicle will be calculated based on the sticker price of the car, lease period, residual value of the car, and interest. Leases are typically 36 months, and with residual values usually 40 - 60% of the invoice price of the car, leasing enable some drivers to afford a much newer car than they would have been able to otherwise.

Down payment
Similar to buying a car, most leases require some down payment, although this can be reduced through a higher monthly payment. Many car manufacturers also run special lease offers that involve no money down when leasing; however, that may also increase the monthly payments. Putting up a sizeable down payment can significantly lower monthly payments, and is a strategy to be considered depending on what is more financially favorable for your situation - paying a larger sum upfront, or paying more throughout the term of the lease.

Leasing is especially favorable to individuals who tend to change cars every few years. Often the payments will be lower when leasing, and then drivers can simply exchange the car for another model at the end of the lease.

Repair and maintenance costs
Another perk of leasing a car is that the driver is often not responsible for major repair costs as the vehicle is typically covered by the manufacturer's bumper-to-bumper warranty for the first 36 months. Some dealerships will also cover scheduled maintenance or oil changes during the lease.

Buying a Car

Reduced expense over the long term
Whether a car is for convenience or a necessity, for some drivers, keeping costs low outweighs the desire to have the latest-and–greatest model. For those that don’t hold it as a priority to drive a new car, and can own a car for 7 years or more, purchasing a slightly used car can be an attractive option. For one thing, insurance costs are much lower on a used car than on a new one. Most cars are financed over five years, leaving any period after that debt free. For example, a lower-mileage car that’s two years old can be expected to last at least 10 more years under normal conditions. Averaging your monthly payment over your expected holding period, it is clear how cost-effective buying can be.

No mileage restrictions
Lease terms often come with annual mileage restrictions, such as a cap of 10,000 to 15,000 miles. Those that go over the allotted mileage at the end of the lease are forced to pay a hefty penalty, often up to $.30 per mile on the overage. Drivers with a long commute may prefer to purchase the car so as not to be restricted by lease mileage allowances.

No leasing fees
While leasing offers lower money down and monthly payments, there are often high associated end of lease payments involved. First, most car companies charge a disposition fee, which is often hundreds of dollars, to return the car to the dealership without leasing another. Second, there are wear-and-tear costs to fix any damage or wear to the car that must be paid off before returning the vehicle. Finally, lessees face even more hidden fees than buyers do. Common pitfalls are acquisition fees, destination charges, early termination fees, and ensuring the residual value of the car isn’t overstated.

Whether it is more advantageous for you to buy or lease a car ultimately depends on how long you plan to have the car for. If you’re definitively going for a short or long-term holding period, your decision is more clear. For drivers falling within the four to six year range, further analysis is needed to determine which option may be more suitable. For many, the decision comes down to more than cost, as the flexibility of leasing and ‘built-in’ upgrade dates becomes a lifestyle decision.


Financial Planning Association of Massachusetts member Kristin McFarland is the Director of Strategic Partnerships with The Darrow Company in Boston. The Darrow Company is a fee-only asset management and financial advisory firm focused on building and preserving the wealth for their diverse client base.

Kristin McFarland is an investment adviser representative of The Darrow Company, Inc., an SEC registered investment adviser located in Massachusetts. The material contained in this article is for general information only and should not be construed as the rendering of personalized investment, legal, accounting, or tax advice.

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