Buying Versus Leasing A Car Is Not Black or White

Sharks scare the living heck out of me. I love the beach, but I only love the extreme shallow waters of the ocean.  I’m more of a lake guy.

What scares me about sharks?  The idea of a damn school of sharks!  Think about them surrounding you.  Oh, and you forgot about that baby cut you had that is dripping a bit of blood.  Boom!  Shark heaven, human hell.

Alright, maybe I am a bit extreme, but the extremes are what tend to scare people, and I am no different.

Thankfully, my fear of a pool of sharks has never become a reality (thus me writing this).

However, for me, car dealerships are a similar version of a pool of sharks.  It seems that anyone that walks into a dealership walks in with a scent of blood on him or her and the sharks attack.

Everyone always says when you are in the wild (how often are we in the wild?) that you should be calm when you encounter a wild animal because animals can sense fear.  So stay calm and everything should be good.

Well, I tried this a while back when I bought my car… and it didn’t work.  I walked into the dealership and a salesman came up to me.  I slapped hands with him like I do with my longtime friends and in a way that meant our next words would be about our families.

Nope.  First words out of his mouth, “What are you looking for?  The new ‘09s (when I was buying my last car) are LEGIT!”  And there I was, in the middle of my feared pool of sharks… with the scent of blood all over me.  Dammit!

Cars are necessary (at least in Atlanta), thus having to deal with dealers is, most of the time, necessary.  The best thing you can do when you have to deal with these guys is to know what to ask of them when you walk in.  One of those questions typically is whether we lease or buy.

 

Breaking it down to simple ABCs

We have all Googled whether to buy or lease a car, and we come back with the simple pros and cons, but that’s it. No definitive answer.

Google tends to list out a ton of examples, and we are able to find a way to fit into one situation in both cases.  We then leave Google still confused.  We need knowledge!

Here is how I view it:

Lease Pros:

Cash flow today (lower payments)

Able to upgrade our cars as quickly as we upgrade our iPhone.  Stay up with new technology.

Lease Cons:

Always leasing means we always have a car payment

We won’t really be able to drive to Miami and back too often in one year.  We have annual mileage restrictions.

Buying Pros:

The damn thing is yours… do whatever you want to the car

Have some equity.  When you want a new car you will be able to get something out of your current car… you own it.

Buying Cons:

Higher upfront costs (down payment) and higher monthly costs while the loan is outstanding.

Maintenance costs can escalate after the warranty.

 

Lease with knowledge negotiate with a force

Choosing to lease a car doesn’t mean the process got easier or really that different (as opposed to buying).

We still must deal with salespeople and we still must negotiate.

Understanding what the lease agreement includes (and doesn’t include) is necessary to keep you from getting screwed either early in the lease or when you return the car.

This article from the New York Times was great.  The columnist walked through his experience leasing a car and even provided his lease agreement for everyone to see.

Two terms that are really important to know about leasing:   capitalized cost and residual cost.

Capitalized cost is another term for the price of the car (they just like to use it when you are leasing).  Even if we are leasing, there needs to be a starting price on the car, that’s the capitalized cost.

The residual value is the value the dealership determines your car will be worth when your lease is done, usually three years from now.

The difference between the capitalized cost and the residual value is the amount that determines your lease payment.

Alright, let’s break it down.  If we lease an Altima and the capitalized cost (purchase price) is $25,000, the dealership determines our residual value to be $15,000.  What this means is that when we return our lease in three years, we will have the opportunity to buy the Altima for $15,000.

For the lease we are basically (simplifying things) taking $10,000 ($25,000 - $15,000) and dividing it by the number of months of our lease (36).  This gets us a lease payment of $277.78 per month.  Not bad.

Here is where we need to become the Priceline Negotiator!  We can either negotiate the capitalized cost down or the residual value up.  Either of these will shrink the difference between the two and lower our monthly payment.

Be careful in negotiating the residual value upwards because if you plan to buy the car after the lease, the higher residual value will make it more expensive to buy at that time.

 

How to become the Priceline Negotiator when buying

When buying a car, we must pay a little more up front with our down payment.  That means that negotiating our price (which determines our down payment) is a HUGE deal.

When I went to buy my first car, I negotiated in what may be deemed a different way.  Negotiating doesn’t have to be like we see in the movies with two people sitting across the table passing back prices till a compromise is reached.

Instead, I determined the exact car I wanted.  The year, color, interior color, features, everything.  Since I was afraid of the pool of sharks from my earlier experience, I decided to deal with them via technology.

I found each dealer near me and sent them a fax with the specs of the car, exactly how I wanted them, and told them to fax back their best offers.

Every dealer faxed back responses and I found out that they were all negotiating over one car (because there was only one in the Atlanta area that fit my specs).  Now who is the shark?  Ha!

Anyway, I got it down to the price I wanted, but the point of the story is that when buying a car, we need to negotiate and negotiate hard.  We need to realize that they want to sell and we want to save.  They can’t sell without us spending money, so make it on your terms… not theirs.

 

When the middle is the answer

I hated testing.  There was a right answer and a wrong answer.  The middle was always an incorrect answer.

When deciding between leasing and buying the middle actually might be the right answer.

I see that leasing is a good option for that person always wanting to have the best technology or the person who needs a car today, but also needs cash flow for other necessities.

Buying is a good option for the person who wants to drive the car till the wheels fall off, and for the person who doesn’t care about the newest of technology.

The breakeven (number of years we need to own a car to make buying better than leasing) for owning versus leasing comes out at about six and a half years (see my calculation below).

Wela buy vs lease car calulations

 

In my opinion, though, I think that both are the wrong answer.  The car that I currently drive was bought brand new, and I have since determined that I won’t be buying new going forward.  I also won’t be leasing.

I’m going to be buying pre-owned.  What this means is that I will buy the car that someone leased and has returned to the dealer.

This means that the person who leased the car will pay for a large chunk of the depreciation of the car and I will get it at the residual value (or less with some Priceline Negotiator skills!).

By getting a car pre-owned, it is basically new because within a lease agreement, the person leasing must keep the car in great shape, has limited miles they can drive and must keep it maintained.

So here we come and swoop in on the pre-owned car from a couple years ago with only 25,000 to 30,000 miles (maybe some with less).  Then, we get it for 35-40% off what it would have been new.

I’ll take that type of discount any day of the week.