Lease or own, which is a better experience?

January 11, 2008 10:16 AM

What's the best way you've found to evaluate whether to lease or buy when financing the purchase of a car? Can I treat it as a forward or future contract? Can I negotiate the strike price? Does anyone have experiences on which worked out cheaper for them (lease, buy)?

I was computing the NPV of loan, lease-to-own or lease at each interval (3, 4, 5 years) and try to find which is cheapest. Ideally I would like to have a new car at either 3 or 4 years to get rid of it before the warranty expires. Actually all NPV calculations are within the warranty as I hate owning cars past warranty.

What have been your real, empirical experiences with on whether lease, lease-to-own or a loan would be best?

posted by geoff. to work & money (6 comments total)

I leased a car a couple of years ago which I eventually purchased. I had three options: 1) Pay cash 2) Finance or 3) Lease. I used a strictly spread sheet approach to evaluating my choices. I knew the wad of cash could be put into a safe investment and earn interest over 3 years. I knew what the finance charges were for loan and I knew what the total charges were for the lease including the buy out price at the end. In my case both the loan and lease ended up cheaper if I actually stuck to my guns and didn't touch the cash. There were some special cash incentives thrown in for the lease which made it the most beneficial of all in my circumstances. It even ended up a little better because at lease end I ended up buying the car for less than my strike price.

The car I owned before that made the most financial sense as a cash purchase. I couldn't get a low enough interest rate because the auto companies weren't in the same state of panic they were 3 years ago.
posted by substrate at 10:35 AM on January 11, 2008

If there is no chance that you will go over the mileage allotment and you want your payments to be lower than if you bought, leasing is the way to go. Plus, very little maintenance costs and you can get a new car every time the lease is up.
posted by smoothhickory at 10:52 AM on January 11, 2008

I have a two year lease. It made sense for me to lease it at the time (15 months ago) because (1) it's a sporty car that I wanted to drive for two years and then wash my hands of, (2) the residual rate on the 2 year lease was attractive and (3) for unrelated reasons, I wanted to minimize up front cash outlay.

It's biting me on the ass now because I ended up moving to a city where I am less reliant on a car (in fact, my only regular use for it is my once a week grocery store trip). And since it's such a pain in the ass to get out of a lease, I'm basically carrying the lease payments, insurance cost and parking cost for no good reason. If I had bought the car, it would've been much easier to get rid of (yeah, there are ways, like SwapLease, but they are painful). The upside is that I am putting so few miles on the car that it is likely to be worth more than the residual value when my lease is up.

So, my advice is: if you are very very certain that you will indeed need a car for the life of your lease and you insist on having a new car* every few years, then lease. If not, buy.

*The overwhelmingly smart thing to do is buy a one to three year old car that has already taken the big depreciation hit. But the allure of a brand-smacking new car is hard to resist--it is for me, anyway.
posted by mullacc at 11:46 AM on January 11, 2008 [1 favorite]

Can I treat it as a forward or future contract?

I've been thinking about this and I'm leaning toward calling it a "put option." You're long the car and the "put" that is your lease is your downside hedge. If the used car market treats you nicely or if you keep the mileage low and the car ends up worth more than the residual value, you can buy out the lease and sell the car on the market (and sometimes the dealer will just credit the spread to a new purchase/lease). But if the car ends up worth less than the residual, you can put it to the dealer. The rub is that they can charge you for damage beyond standard wear and tear, which is a subjective measure.

Can I negotiate the strike price?

Check out the forums on Edmunds.com for the specific car model you're interested in. There will be a lease pricing thread with the latest info. Though I believe that lease rates are handed down from the captive credit units to the dealers (and people on Edmunds often quote leasecompare.com, so apparently that info is out there), so I don't think you'll find much flexibilty in those negotiations. The residual rates change monthly by and between the length of the lease, so if you're flexible in lease length you can buy on relative value. But, as far as negotiations go, you're going to want to bid down purchase price and play competitive dealers against each other. The residual rate is applied to the sticker MSRP rather than the negotiated price.
posted by mullacc at 12:13 PM on January 11, 2008

mullacc hit it on his footnote. "Brand-spanking-new" is not the frugal decision.
posted by GPF at 5:01 PM on January 11, 2008

No, it is not. But if I have to spend an hour a day in my car for a commute, I don't want to dread the experience.
posted by geoff. at 1:08 PM on January 12, 2008