The only thing that many personal finance writers hate more than buying a car with a loan? Leasing a car. However, there are times when it might make sense for you to lease. This is especially true if your alternative is to buy a car with a 72-month loan.
Swapalease performed a study to determine the financial sense of leasing versus getting a 72-month loan, and here’s what they found:
In what they called an apples-to-apples comparison, they looked at a $30,000 vehicle for which you put $1,000 down and paid 5% in interest and 6.5% in sales tax. They found that you could save $2,000 overall by getting two 36-month leases, rather than one 72-month car loan. And if you were to go through the process of four 18-month lease transfers, you could save as much as $5,000.
Could a Lease Be Better for Your Finances?
Of course, Swapalease has an interest in showing these numbers, since they specialize in lease transfers. That being said, a lease still might make more sense than a long-term loan (and in car terms, a six-year loan is kind of a long time).
With a 72-month loan, you’re paying a host of fees, from loan origination fees to interest charges. On top of that, if you have a small down payment (like the $1,000 assumed by this comparison), you’re going to pay even more money over the long haul.
Almost three years ago, I bought a brand-new car. Though I financed it for 60 months, I had a bigger down payment than $1,000 and a 1.9% interest rate. In my case, the numbers shake out a little differently — since I borrowed less, for a shorter term, at a lower rate. My numbers don’t show the same savings. Plus, I tend to drive my cars for eight to 10 years, so there’s no “need” to upgrade so often.
But I can see how some consumers might benefit from a lease program, especially if they have high turnover in cars financed for long periods of time.
What About Your Lifestyle?
I think one of the keys here is lifestyle and expectations for your cars. If you finance your cars for 60 or 72 months, but get a different car every three or four years, it doesn’t make much sense to buy. When you trade in your older car, you end up having to make arrangements to pay off the rest of your loan (usually through some sort of expensive dealer arrangement).
If you know you want to upgrade every couple of years, it probably makes more sense to lease a car than it does to finance one. That way, you don’t have any strings attached to the car, and you don’t have to worry about depreciation.
Alternatively, of course, you can always just buy your car with cash, paying in full and not borrowing or leasing.
Which method do you prefer? Paying in full, financing, or leasing?