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Leasing vs. Buying

Using Lease-vs.-Buy Models

Information about leasing and buying vehicles often includes a comparison of the costs and features of these options ("lease-versus-buy models," or "models"). These models may be helpful as a starting point in deciding whether to lease or buy. The comparison may include a chart or other numerical presentation and may appear

  • In consumer publications and other articles
  • On television, radio, or the Internet
  • In dealer showrooms and at leasing companies.

The models are developed by different sources and may cover leasing, financing, and (or) buying with cash. The information in this section focuses on leasing and financing (the latter referred to here as "buying"). This material may be used with

  • A specific lease proposal you are considering
  • Information obtained from a lease ad
  • A hypothetical lease you wish to consider.

Limitations of models

Models compare the costs and features of leasing and buying a vehicle in different ways. They usually have three major limitations. They may

  • Exclude your personal preferences (subjective factors)
  • Exclude some important factors and thus be incomplete and simplistic
  • Include factors that are complex and difficult to specify with accuracy.

Exclusion of personal preferences (subjective factors). In considering whether to lease or buy, you may have personal preferences, aside from costs, that are part of your decision. Although these preferences may have cost implications, they are usually excluded from models. Examples of excluded items are

  1. Any preference you have for owning a vehicle
  2. Any preference you have for changing vehicles frequently
  3. The importance to you of driving a vehicle that maintains its value well over time More info
  4. The importance to you of protection from unexpected depreciation of the vehicle (see the section Future Value)
  5. The importance to you of specific features of a particular lease or finance plan, such as gap coverage
  6. Your financial limitations, when you are considering a particular vehicle
  7. Your attitude toward disposing of your vehicle, for example, negotiating the trade-in or sale of the vehicle if you finance, or having an inspection for excessive wear and tear if you lease.

Problems of incompleteness and oversimplification. Models may exclude some important factors in the lease-versus-buy decision in an effort to simplify the comparison. Examples of items that may be excluded are

  1. Your ability to make the down payment and pay other front-end costs, make monthly payments, and pay the other required costs of a particular lease or finance plan
  2. The time value of money and the value of any difference in up-front costs More info and monthly payments More info in a particular lease versus a particular finance plan
  3. Your ability to pay the costs you may incur if you terminate a lease early compared with paying off financing early
  4. The value of gap coverage if the coverage (and the cost) is included in the lease or loan More info
  5. The cost of or effect on the vehicle’s value of the number of miles you may drive over the lease term More info
  6. The value of the protection from an unexpected decline in the vehicle’s value afforded by a lease More info
  7. The cost of or effect on the vehicle’s value of any excessive wear and use you (and your family, friends, pets, and others) may cause to the vehicle More info
  8. Your ability to obtain funds to purchase the vehicle at the scheduled end of the lease or to make a down payment and pay other front-end costs for another car in a finance plan or another lease
  9. Your ability to find in the marketplace the particular lease or finance terms included in the lease-versus-buy models. More info

Problem of complexity. Some models have limitations because, in an attempt to be thorough, they are so complex that they require you to project or estimate certain information that is not readily available regarding

  • The vehicle
  • Your economic circumstances
  • The underlying lease and loan terms.

The estimation process is often difficult, time-consuming, and imprecise. Examples of items that the models may require you to research or estimate are

  1. Lease purchase-option price. If the model requires you to provide a purchase-option price and you are not considering a specific lease from a specific lessor (that is, you are considering information from a lease ad or a hypothetical lease that does not provide the purchase-option price), you will need to estimate this price. Or if you are considering a specific lease from a specific lessor and the purchase-option price is based on a value given in a used-car guidebook (which means that the lease does not specify a price), you will have to estimate this price. An estimate is required in the latter case because the relevant guidebook that provides used-car values may not be available until the end of the lease. In either case, the purchase-option price can be estimated in two ways: (1) develop a price from a current residual value guidebook More info or (2) project a price from a current used-car guidebook. In some instances, you may also need to compare this estimated purchase-option price with the residual value stated in your lease agreement. More info
  2. Residual values. The model may require you to provide residual values, or to ensure the accuracy of the residual value used in the model. If the residual value is incorrect, it will affect other lease terms.
  3. Costs based on length of lease or financing. Some items in the comparison--for example, the security deposit (lease), up-front costs (lease or financing), the APR (financing), or the residual value (lease)--can change as the length of the lease or finance agreement changes. Therefore, you will need to repeat the calculation each time you change the length of the agreement. If you do not change all the finance or lease items as required, the result will be incorrect or not what you intended.
  4. Time value of money. Lease and financing plans typically differ in the number, timing, and (or) amount of up-front costs and monthly payments. Many models assume that you will (1) invest the resulting cost difference, (2) use the cost difference to reduce the balance on an existing loan, or (3) use the cost difference for another purpose. The models assume a specific interest rate or yield or ask you to provide a rate. However, there are two problems with this approach: (1) You may not be able to identify the proper rate or yield, and (2) you may not have the money available for these uses. More info

Bottom line

Lease-versus-buy comparison models have several limitations. Do these limitations mean the models are useless or misleading? No. Some of the models can serve as a helpful starting point in the lease-versus-buy decision. However, be aware that the models are not perfect tools for the comparison, and do not rely on them as the sole or final factor in your decision. Carefully consider all the information you can obtain about the costs and features of leasing or financing; shop around; talk with family, friends, and fellow workers who have financed or leased. And then make your decision.

Next topic: Up-front, ongoing, and end-of-lease costs > Up-front costs

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Last update: May 5, 2003