October 15, 2016

Leasing or Buying a Car..Which Is Best?



I will admit, this is a post designed to help me. Even so, I imagine there plenty of folks who wonder the same thing when it is time to trade in that old clunker that is smoking up the neighborhood. Betty and I are close to such a decision and I am torn.

I have always purchased, not leased, my cars. I will buy used but only if less than 2 years old. I usually pay cash to avoid the monthly payments. That is especially true on a depreciating asset like an automobile that loses 25% in value the moment it leaves the dealer's lot. I get the best deal I can, write a check and am done with it. If we spill something, or the dog has an accident, we clean it up and forget it. When some less-than-considerate driver dings the door in the parking lot, I shrug it off.

With a lease I have to pay a few thousand dollars in cash upfront, and make regular payments for the use of the car, normally for 3 years. At the end of that time, I turn the car in, pay for any excessive mileage or wear and tear, and walk away with nothing to show for the money I have spend over that period. In essence, I am renting the car. But, I am not paying for depreciation.

So, why would I consider a lease when the money buys me nothing of lasting value? There are three key reasons:

1. If I purchase a car I will be spending somewhere around $20,000. That money will come from an IRA account, thus triggering taxes on that amount. On top of money withdrawn to live on, that extra income will push us into a higher tax bracket. With monthly lease payments I do not have to withdraw all that cash at once and trigger tax consequences.

2. At the moment Betty and I have different enough schedules that two cars are almost essential to keep the peace. We could live with one (obviously), but there would be some major compromising. So, replacing the 13 year old automobile with mounting problems is a requirement.

3. At the end of a 3 year lease, we may be in the place where one car is just fine. I wouldn't own a car that would have to be sold privately to recoup maybe 40% of the purchase price.

You may argue that I could buy a car for little money down and monthly payments spread over 4 or 5 years. They would be higher than the lease payments but not unworkable. Of course, I would end up paying money in interest charges, but at today's rates it wouldn't be a lot. 

So, it comes down to owning something that would result in the loss of a substantial chunk of ready cash and trigger tax costs, or "borrowing" a car for less money but with no value at the end of the lease.

What are your thoughts?

46 comments:

  1. The thought that it would put you into a higher tax bracket would convince me to lease. We have thought about leasing over the years, but like you, have always paid cash for our vehicles. Our last purchase coincided with a surplus of cash we had (we underspent our budgeted amount a lot, mainly due to less travel, related to husband's health changes).

    I'll be interested in what others have to say. We will be going to one car eventually, since I am doing essentially all the driving at this point. The convenience of just turning in your leased car and getting another one brand new has a certain appeal. It keeps it simple, and as we age, we do not want to have to worry about the car repairs that come with an aging car.

    Good post Bob. You always seem to have a sense of the issues that we seniors are thinking about.

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    1. Thanks, Carole. The tax aspect might be the tipping point for the discussion. I am still dealing with the tax consequences of the slow windup of my parents' estate, which causes it's own tax ramifications. I don't need a more complicated financial life at this time!

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  2. One financial rule of thumb says you should own assets that appreciate, and rent assets that depreciate. By that score, leasing would be better. Whether that's true or not, I have always bought my cars, some new, some used, but I finally decided to lease my latest one, which I got a year ago. Why? Because (as you say in #3) I'm not sure I'll need a car after three years and I don't want to go thru the hassle of selling it; and also, with my three-year lease lease I get a three-year warranty and three years free maintenance. So ... no worries, which for me is worth the few extra dollars it's probably costing me in the end.

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    1. I think I may be at the same point in my analysis. To simplify things and avoid the tax problems I am likely to trade some expenses for convenience.

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    2. Very helpful to read what you've done. Although the income thing isn't our issue, it's more lack income to just finance another car. My van in 19 years old and really on its last leg, I do love it though. But I will need a reliable car to get to my treatments in Sacramento, so maybe leasing is the way to go for us. Less Out of pocket. Then when my husband retires in 4 years we can deal with it. Excellent ideas.

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    3. I began thinking leasing would be best, then started to think buying was better, and now am leaning toward leasing again. One problem with blogging is you have to be open to changing your mind after reading what others think!

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  3. Bob, if you anticipate low mileage on the car it will make a lot of sense to lease at this stage of the game. However, if you go over the mileage, return fees can be a bit harsh. The upside is that leases have very low interest rates versus interest rates on a purchase. We just took a 3 year lease at 10,000 miles per year on my new car and think it will work well for us. Good luck with your decision.

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    1. Betty will drive our other car (the one we tow behind the RV) because it can carry a lot for her projects. Whatever I buy or lease will be small, with good gas mileage, and probably be driven less than 8,000 miles a year.That would keep me under a lease mileage cap, so your point is appreciated.

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  4. I have been having the same thoughts, Bob, as we may be able to get down to one car in maybe 3 years or so. One thing to add to the thinking: If you take the $20,000 out and it becomes income, this will ALSO affect your Obamacare eligibility for Betty.This became an issue for me when I was offered a very small part time job teaching nursing.. the income would have been nice,except the amt. of income would have changed our Obamacare subsidy to the point that my whole salary would have gone to pay for health insurance! I'm just sinking deeply into the loveliness of retirement these days!!!! It took 3 years to get clear on it! So-- maybe leasing is the best option for just this next spot of time.. also ,I am enjoying the travel photos!

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    1. I am afraid we will be well over the income limit for healthcare subsidies due to my parents' continuing estate distribution. But, your point is one I thought of and tried to figure out how to squeeze Betty under the wire...no such luck!

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  5. When it comes to leasing cars I figure that someone is making money on the deal and it's not me. That said, you have to base your decision on your own circumstances and if the transaction advantages outweighs the financial cost (if any) then hey - it's your money and it's not going to break you either way. I think you've already decided to lease and are looking for a compelling reason not to, I don't think there is one.
    - David

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    1. I have leased once before and decided it was a mistake. But, that was 25 years ago and circumstances were very different. I hate throwing money away on what is basically a rental. But, the tax consequences are a new wrinkle, and so are our car use patterns.

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  6. Thanks Bob for bringing up this topic. Especially the above comments of people who have leased. We do need to get a new car next year for me, and this just maybe the answer.

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    1. The response so far is solidly in the lease column, which frankly kind of surprises me. Betty is still pushing for an outright purchase and her vote counts for a lot (!). We will take all the comments into consideration and probably make our move just after the first of the year, one way or the other.

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  7. when I look at vehicles, I drive them until they become problematic, then replace them with new. Over the typical 15 years, owning is far more economical. If you want a new car every few years, leasing or owning is about the same. How long are you likely to keep it? That is the first question.

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    1. How long we want to keep it is really the central question, Fred. I think we will be a one car family within the next 3-6 years. We usually keep our autos for at least 10 years, some even longer. Reliable, safe transportation is my major concern, but is too soon for us to simply donate Betty's 13 year old Hyundai and rely on one car.

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  8. I've just purchased a "new" car. Buying a new vehicle should be exciting, but it's not! Years ago, I decided that purchasing a brand new car was silly, when the depreciation costs are considered. An article I read suggested 19% depreciation in the first year, then 15% in the next 2 years. So I look for a "new" car that's 2 yrs old or less with 30,000km or less. A trade-in never offers the value of the vehicle but then I'm left with the burden of selling the old one. I've never had enough disposable income to purchase a vehicle outright so I've always arranged a bank loan. Leasing is not an option given the limit on the mileage. When I was working, I averaged 50,000km/yr. I'm still averaging 30,000km/yr. But leasing would certainly be an option in the future when I anticipate that I wouldn't put so many miles on. It really is dependent upon your driving habits, isn't it? I realize I'm quoting metric numbers then talking mileage. Kilometerage isn't a word, is it?!

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    1. Kilometerage is a word...you just used it!

      I anticipate a leased (or gently used car) would get less than 8,000 miles (just under 13,000km/yr). I would use it for errands and volunteer stuff around town. The larger Honda would be used on longer road trips because of its carrying capacity.

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  9. Personally I think a lot of people lease cars because it allows them to get more car than they can really afford, and they end up in a lifetime of monthly payments. Since it's the end of the year you could put $10K down and get a loan for $10K, then pay off the loan after the first of the year. This may help with your tax bracket. That's my plan when my 12 year old Jetta needs to be replaced. As always, love your blog.

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    1. I hadn't thought of the quick loan payoff after the first. Another aspect to consider.
      Thanks, Diane.

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  10. Here's some food for thought - http://www.mrmoneymustache.com/2016/10/04/so-i-bought-an-electric-car/ This is how the next generation is thinking

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    1. I haven't considered electric, but I will take a look. Mr. Money Mustache is usually a very good source of thoughtful information.

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  11. I am not a fan of leasing, but I own a 2009 model car and drive it across the country regularly with no issues, so I also obviously buy cars older than two years old. I agree with the other poster. Just remember that when you lease, you, as theother person said, are making the leasing company lots of money. Also, I am not the neatest driver and have multiple dogs,and my experience the fines for having a less than perfect car at the end of the three year period had a hefty cost.

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    1. That is the one aspect of leasing that bothers me. I don't want to become obsessed by every ding or spill. I have no experience with how the charges are determined, something I will do before signing any papers.

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  12. When you say that you are "not paying depreciation" with a lease, that is not really true! What they are charging you for the lease is roughly the expected depreciation on the vehicle plus financing costs. Since vehicles depreciate most rapidly in the first years of life, the average annual depreciation will be quite a bit higher for a vehicle that you lease for 3 years as opposed to a vehicle that you buy and keep for a longer period of time. Leasing makes sense if you want to replace your vehicle every 3 years, but always having a relatively new vehicle will likely cost more than buying and replacing every 10 years, for example. In your case it sounds like you may want the vehicle for only 3 years anyway, so the difference between owning and leasing is that with leasing you will be paying financing costs (assuming you would pay cash if you buy), but you won't have to deal with selling the vehicle at the end of the 3 years. Since financing costs are low, and since you have the tax issue as well, I would go with leasing. By the way, Madeline makes an excellent point about Obamacare. For anyone receiving subsidies, the "implicit tax rate" on income can be quite high; as your income goes up, your subsidy will go down.

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    1. The tax issue is important, but as Diane noted above, there are ways to avoid the worst of the tax aspects by taking out a loan but paying it off as quickly as permitted.

      Will we be a one car family in 3 years? In 6 years? That is the question.

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  13. I just purchased a new car after driving the same Honda Civic for almost 17 years. I had originally intended to lease with the rationalization being I'd have an almost new car all the time. But in the last year I've rented a car about six times during travels, etc. and I realized that I just wanted to get a car, get used to it and live with it until either I or the car passes on. When I paid off the Honda, I started putting money in a "Wheels" account every month so the cash was there for this purchase. Obviously I feel as though I've moved to a different planet with all the changes in auto technology and I'm happy that when I adjust to everything, I'll be done for awhile and not have to readjust every three years. But just in case I need to get a new car when I'm 89, I'm still going to feed the "wheels" account.

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    1. Your mindset is one I have followed for years. I like owning the vehicle and not worrying about how it is treated, though I treat them very well!

      One option I haven't mentioned is putting another $1,000 into the 13 year old car, that is worth about $500.

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  14. I think we are about 9 or 10 years older than you. We would not be happy with one car, and I would bet that you will not be either when you are our age. Of course that depends on your lifestyle. More often than not we go our separate ways for at least part of each day. We have many different interests and we don't even like to go to the gym at the same time. We could adjust if we had to, but I hope that is not anytime soon. Hopefully you both will be healthy and active for a very long time. I vote for buying an almost new car.

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    1. Your "side" is beginning to build up votes. Officially, I am still very much on the fence.

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  15. We live outside our city and cannot really get anywhere without cars, so we still have two. Last year they were both VW diesels, so we had some decisions to make. I had a fairly new (purchased) Passat, which I pretty quickly sold back to the VW dealer. Since my previous car was a Saab that fell into the one model year with no warranty when they dissolved the company (maybe it's me!), I was feeling a little burned by cars. So I leased a smaller VW with a gas engine. It's lovely, I'm driving a lot less since I retired, and the cash flow is perfect for our finances this year.

    DH is still driving his Audi (with VW diesel engine) and has always purchased Certified Pre-owned cars with good luck. It appears the settlement from VW will give us each a check (his much larger than mine, obviously, since I dumped mine last year), and he will look for another preowned. But we're also getting to the point of asking ourselves when we can get by with one car. Like you, we're not there yet, and our location outside of town makes it improbable in the near future. But we can see it happening eventually.
    --Hope

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    1. My dad drove until he was 87. I imagine I will manage something in that range, so I still have 20 years to go. That leans towards buying.

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  16. My parents kept separate cars in the Valley until the end. It seems like a car necessary place. The older the cars got (because they got so few miles), the less they cost to insure and maintain. Dad used to change the oil and rotate tires just because he thought he should.

    I like Diane's idea. Take out the 0% loan that most car companies offer and pay it off at the beginning of next year. You are only looking at owing for about three months!

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    1. Yes, that is a good idea. I will investigate that angle more closely.

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  17. I've just heard of another slant on the car ownership/lease issue. Some urban dwellers rely on public transportation or bicycles/motorbikes during the week then rent a car on the w/e or vacation for doing errands or trips.

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    1. Yes, there is the Uber option, too. Where we live is too suburban for public transportation, unfortunately. If we lived in a city setting I am pretty sure we would already be a one car family.

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  18. After years of buying new cars (for cash), we leased one recently for two years. One aspect of our decision not mentioned directly in previous comments is that automotive technology is changing rapidly and gasoline prices have been fluctuating wildly. In two years, an electric may make sense. It is even remotely possible that robotic vehicles may be available and desirable. Thus, we now view our auto as temporary until the next nifty thing arrives.

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    1. Thank you, Dick. I hadn't thought about that aspect of the decision: in 2 or 3 years an electric or really efficient hybrid may make sense. If I have purchased sometyhing I would be committed to whatever I bought today.

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  19. I am certain that you can save money by driving older cars. Having said that, for me, I am through with old cars. I just don't want to deal with them, especially in bad weather.

    So then the question becomes.... Purchased or leased what does it cost to drive a car per year. Sometimes it works out that leasing is less because the manufacturers put money into the lease deal rather than just reduce the price of the car. Sometimes a purchase costs less. Sometimes a lease is by far the less expensive way to operate a vehicle. A subsidized lease is sometimes hard to beat.

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    1. More to consider. I am really glad I wrote this post. Clearly, this is a subject with some excellent opinions and thoughts on all sides of the decision.

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  20. Call me old fashioned but I like to pay cash upfront and own the car and not be worried about the state of the car in three years time or my mileage. it's a heart rather than head thing. One thing that's changed in the U.K. Is that cash used to be king when buying a car. Saying you were a cash buyer got you a hefty discount. Not so now. All the dealers want to sell you a finance deal as they make commission on that. Sad but true.

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    1. You are quite right, John. Cash is not what sellers want. Financing pays the bills.

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  21. As John said, sometimes the emotional side of it can be as important as the financial side. For me, the anxiety of having to keep the car like new would be an issue. Of my last four vehicles, something nasty was spilled in three of them during the first week I owned them (Thai soup, super sized fountain drink, child throwing up). Although I am generally not a bad driver, I managed to badly dent the rear fender of my previous nearly new car backing out of my driveway on a dark rainy night. And the vehicle before that was rear-ended on an icy highway (not my fault), causing $8,000 damage in the first year I owned it. I am more at peace accepting that my own car is now less than perfect than worrying about ruining a leased car. One last thought - is Betty worried that she will be the one without a car in three years if you go down to one vehicle?
    -Jude

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    1. Last question first...no, she would always have priority in scheduling except for something like a doctor's appointment. Her activities tend to be more time-sensitive than mine.

      The problem with the car's condition is the thing that is keeping me from deciding that a lease is the obvious answer. Bailey, our dog, could never ride in a leased car, just because she tracks in dirt and stains. I don't run into things (yet), but I would have to adopt a new attitude toward interior cleanliness.

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  22. I leased a 2013 Subaru Outback 3 years ago. I spent about $1K more to lease than buy it out right. But I had a similar IRA tax issue so I figure I saved some money overall. I also leased because car technology is changing fast right now and I thought I might want a different car in 3ish years. I did not do enough research so I put money down when I made the lease. That was a mistake. In fact on some cars you can get money back from the dealer in cash to lease. The dealer will write you a check. In my case I have to buy the car or trade it in to recover my down payment plus the car has not depreciated as much as projected. So I plan to buy it out and keep the car for now. I would have preferred to have less $$ in the car so I could just turn it in and forget it.

    So if you lease make sure you understand all the little fees they put in the contract and charge you for. Look on the internet at Bogleheads.org or similar place for advice.

    Good Luck
    Bill

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    1. Thanks for the tips, Bill. We still haven't decided, so the 13 year old Hyundai keeps puttering around.

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