Leasing a Car: Frugal Option

Dec 28, 2022 By Susan Kelly

The most cost-effective way to acquire a vehicle is to get one two to three years old, pay cash for it, and continue using it until the wheels fall off. Leasing, which requires you to make regular payments in exchange for the use of a vehicle but does not give you ownership of the vehicle, has long been considered the least frugal choice. You are making payments on the vehicle when it is at its most costly since, on average, a car loses more than half of its value in the first three years of ownership, and you will have nothing to show for your payments after the lease is over.

Leasing a car may not be the most frugal option it once was since buying automobiles has evolved to the point where it is no longer as competitive as it once was. Leasing may be the most financially astute option in some circumstances.

Costlier Cars, Longer Loans

Let's look at the state of the automobile industry in the United States to appreciate why better. Americans are those who:

  • Buying in more costly automobiles.
  • Providing financing for greater sums.
  • Taking out loans for lengthier terms.

According to Ronald Montoya, Americans are increasingly choosing SUVs and trucks over sedans. Furthermore, they are shelling out more money for better trim levels and more equipment than in the past. According to Edmunds, the average cost of purchasing a brand-new car in November was $37,981, which is $4,699 more than the corresponding number for 2014.

Most customers nowadays choose to finance their purchases with terms that are longer than five years to achieve lower monthly payments. Despite this, the average monthly payment is now $568, a significant increase from the $492 it was five years ago. Leasing a car with the same purchase price would result in a much lower monthly payment.

Lease vs. Buy Calculation

On paper, buying is still the better option since you will own the car outright and have some equity after the loan term is over. However, "apples to apples" comparisons of a car loan for six years vs. two leases for three years leave out a lot of crucial information, such as the costs of repairs and upkeep.

The longer a car is owned, the higher these expenses get, and most warranties, which pay for most of the costs associated with repairs and maintenance, expire after three years. Normally, the expenditure is insufficient to make leasing the more affordable option; the only exception is for persons who do not have savings and use a credit card or a payday loan.

According to the Federal Reserve, this characterizes a significant portion of the adult population in the United States, whereby two individuals out of every five do not have sufficient savings of $400 to meet unexpected costs. According to Montoya, acquiring a lease is simpler than getting a loan if you do not have money for a down payment on the property.

According to Montoya, another problem is that people who buy brand-new automobiles often need to keep their cars for a sufficient amount after purchase to get the most benefit from their investment. Your goal should be to retain the car for several years without making any payments.

What about buying a secondhand item? Because you are letting the original owner take the penalty for the car's depreciation, this remains the most prudent method to get into a vehicle from a financial perspective. However, when customers finance the car with a lengthy loan, as many do, it makes the strategy less sensible. The typical loan for financing a used vehicle is 67.5 months, almost identical to the 69.3-month average for financing new vehicles.

When Leasing Is Best

When it comes to most situations, leasing is a better option than buying:

  • You have sufficient wealth to purchase a new car every few years.
  • You don't have much money, but you need the certainty that a car with a warranty may provide.

Because the tax benefits that encourage people to purchase these new vehicles also contribute to faster-than-average depreciation, you will be purchasing a new electric vehicle.

Since making the same payment would bring you a more costly car, avoiding the temptation to upgrade throughout the lease is the most frugal approach to making use of this financing option, instead of buying a car that you could afford to lease instead and use the money you save toward anything else. You may also lease used automobiles at some dealerships or utilize a service specializing in lease trading.

According to Montoya, buying your car after its lease is one option to combine the benefits of leasing with those of purchasing a used vehicle. In an ideal scenario, you would accomplish that goal with cash on hand or a loan with a term of three years or less.

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