- Buying a car involves a down payment and a monthly payment. But once it's paid off, you own the car.
- Leasing a car requires a less expensive monthly payment than buying, but doesn't give you any equity in owning the vehicle—unless you decide to buy it when the lease is up.
- Car companies are now offering a third option, called subscriptions. Which of the three is best for you depends a lot on your circumstances, income, and how much you drive.
For many years, I thought of leasing as the thing you do when you can't really afford the car you want to drive—a way for people to parlay a Civic monthly payment into a Benz. That impression was bolstered some years ago when I talked to a guy in Boston who runs a business that makes loans based on car equity. He knew for sure that many of those luxury cars parked on Newbury Street represented not wealth, but debt. "If you're driving a BMW 7 Series, that doesn't automatically mean you're rich," he said. "It just means you can afford a $1,000-a-month lease payment."
I've since realized that it's more complicated than that, and that leases can actually be a financially savvy move, depending on the circumstances.
The Benefits of Leasing a Car
I talked to a guy who works in leasing for Mercedes-Benz Financial who explained leases as a bet where the manufacturer assumes all the risk.
"The idea with a lease is that you're only paying for depreciation," he said. "And at the end of the lease, you have the right to buy the car at a predetermined price. But guessing what a car will be worth in three or four years can be tricky. Say the car company gets it wrong and the car depreciates more than they thought—then you win, because you hand it back over to them and walk away. If it ends up about right, you could buy the car or not. And if the car doesn't depreciate as much as they predicted, then you get to buy it at below-market value. There's no bad outcome, from the consumer point of view."
Indeed, I know a fellow who experienced that latter scenario with a special-edition Porsche. The car just didn't depreciate, so at the end of the lease he bought it and promptly re-sold it for a profit that let him recoup all his lease payments. "Essentially, I drove a cool Porsche for three years for free," he said.
Now, that's not going to happen with many cars. But the mere possibility makes leases a little more enticing, doesn't it?
Pros and Cons: Let's Do the Math
Say you buy a commodity car that enjoys strong resale value: a Jeep Wrangler. If we look at Jeep's financial calculator for a Wrangler priced at $29,540, a buyer will have a payment of $502 for five years (at 4.98 percent financing with $2,954 down). The lessee will pay $275 per month for four years, with the same down payment.
After four years, the buyer will have paid $27,050 and have equity in a four-year-old Wrangler (plus another $6,024 in payments due). The lessee will have paid $16,154 but own no part of that Wrangler. Which person is smart?
Well, the lessee will have an extra $10,896 in the bank (or more, if they invested the $227 per month they saved by leasing rather than buying). But the comparisons get a bit tricker when you get beyond year five, when the buyer has paid off the car and now owns it. After that, it's a payment-free ride, and there's always some kind of equity in the paid-off car.
The lessee, meanwhile, has a perpetual car payment and no equity. But they also have a perpetual new car, one that's probably under warranty and is safer and more efficient (and in the Wrangler's case, nicer to drive and easier to use than older versions).
If you drive a lot of miles, that could skew your decision toward buying, since extra mileage drives down resale and thus ups a lease payment. For example, our hypothetical $275 Wrangler lease is for 10,000 miles per year, and raising that to 15,000 miles sends the payment to $297 per month. On the other hand, there's the question of maintenance. What if your bought Wrangler, paid off after five years, suddenly needs a $2,000 repair in Year 6? See, this isn't such a straightforward decision.
The Third Way
To make it even more complicated, carmakers have added a third option: subscriptions. The idea here is that everything is included—insurance, maintenance, wear-and-tear items. Terms are shorter. In some cases, your payment includes the right to swap into different cars.
Porsche Passport, a program the company offers in Atlanta, starts at $2,000 per month. For that, you get a Cayman, Boxster, Macan or Cayenne, insurance included, with the right to "flip" into a different car whenever you want. For $3,000 per month, you access more expensive vehicles. Last year I talked to a guy who was a member, and he loved it. "I've changed cars every day for some stretches," he said. (A personal concierge switches them for you and even moves your personal stuff between cars). "I can say, 'OK, I'm going to drive a 911 to work and then get a Cayenne for a weekend trip.'" Nice setup, if you can afford it.
Volvo's subscription program—Care By Volvo—is a lot more mainstream. An S60, for instance, costs $750 per month. You don't get to switch into different cars all the time, but you do get the option to upgrade to a new car after only 12 months. And there's no price negotiation, which a lot of people will view as a major bonus. The big variable here involves the insurance. Since it's included at a flat price, that can be either a great deal or a horrible one. If you're a 50-year-old with a great driving record who lives in a rural area, you'll probably be better off leasing the car and calling GEICO. If you're 21, live in Manhattan and have three fender-benders in the past week, then heck yeah, get that subscription. (Assuming Volvo approves you for insurance. They have the right not to, if you're too much of a hellion.)
Is a year too long a commitment for you? There's also GM's program, which is kind of like Uber meets Avis—you book a car via an app on your phone and drive it as long as you need it.
There are month-long terms in some cities, or you can pay by the hour (from $8 an hour for cars, $14 per hour for a big SUV like a Tahoe). And, to take this thing full circle, if you own a GM vehicle you might be able to rent it to other people through Maven. (As you could with any car through Turo). Just to complicate your lease versus buy versus subscribe math a little bit more.