When is Leasing cheaper than Buying?
This is a debate that many new car buyers deal with, what makes more sense? Is it better to have equity in the car? Where is the breakeven between leasing and buying? I will go through 2 scenarios and do the math to see which option is going to provide the best value. The numbers below are based on real life lease offers available as of February 2024.
Scenario 1: Buying vs Leasing a Honda Accord
Assumptions: for both scenarios we are assuming the buyer has good credit (over 720), no trade in, and will only put down the first month's payment and DMV fees.
MSRP: $31,200
Out the door price: $29,000
Tax rate assumption 7%
Buying: Honda is offering a 3.9% intro APR for a 60 month loan. The payment will be $532/month pre tax or $569/month post tax. Over the course of the 5 year loan you will pay $34,200 on the car. After 5 years, in good condition, an Accord can be expected to be worth around $15,000 - $18,000. After the 5 year loan is paid off, no additional payments are required on the car.
Leasing: You can currently lease the same Honda Accord for $309 pre tax, which is $330/month post tax in our scenario. For a standard 3 year lease you will look to pay $11,880. To keep this scenario even, we will assume you can renew your lease into a new Accord with just a 5% price increase after 3 years. That means after 6 years of ownership, you would have spent $24,400 on car payments, but not have any equity in the car after that time.
In this scenario, you can see that buying is around $6,000 cheaper than leasing. The main reason is that the Honda Accord retains its value very well. In the case of the lease, you are paying for the assumed depreciation, but in most cases, a well maintained car is going to lose less in value that what you end up paying.
Scenario 2: Buying vs Leasing a Jeep Grand Cherokee Limited
Assumptions: for both scenarios we are assuming the buyer has good credit (over 720), no trade in, and will only put down the first month's payment and DMV fees.
MSRP: $52,000
Out the door price: $47,000
Tax rate assumption 7%
Buying: Currently Jeep does not have any low APR purchase deals, so we will assume an APR of 5%, which in the current environment is fairly standard for a new car. This would mean the monthly payment on the Grand Cherokee would be around $948 post tax and the total payment for the car would be around $56,900. The value of the car after 6 years is about $17,000 - $20,000
Leasing: You can currently lease the same Jeep for around $410/month. After tax you are looking at around $438/month in lease payments. For this scenario, we will assume you can renew your lease after 3 years for a 5% increase in payments for a brand new Jeep Grand Cherokee
In this scenario, you can see that leasing would end up saving you around $7,000. One of the large reasons is lower maintenance costs. When you lease you can avoid large maintenance items like brake changes and new tires since the initial parts will last the life of the lease. Also in this case, the lease incentives and depreciation rate are on your side. The car will start to depreciate significantly after the first 3 years of ownership, and the depreciation will outpace your lease payments.
Summary
If comparing the two, leasing becomes a more attractive option on high depreciation vehicles. This is a reason many luxury cars are leased instead of purchased, it allows the owner to avoid depreciation of over 50% that you see on many cars. Leasing will also be effective if you can keep your monthly lease payment at 1% or below of MSRP. Meaning, if a car is listed for $50,000, you want your payment, including taxes, to be under $500/month. This is a good way to make sure you are getting the best deal.