Buying Cars - A Comparison Between A Lease and a Sale - Part 1

June 30, 2014

My wife and I recently had the pleasure of discovering that both of our car leases were up within three days of each other, and we had the extra special pleasure of getting to go car shopping and purchase two cars in the same day.

Our reasons for not wanting to lease again have to do with the stress and worry over mileage restrictions and inevitable scratches. My wife should be able to visit her grandmother without having to worry about going over our mileage allotment, and small scratches happen. So, I won't talk about these things further here. But, to illustrate the point regarding why we leased in the first place, I will do a financial comparison of a lease and a sale.

To make this comparison "apples to apples," I'm going to run the numbers for a new Chevrolet Traverse (one of the cars we just turned in). I am going to assume a 2% interest rate in both cases, and I will further assume no haggling. To calculate the depreciation for the lease, I will take the blue book value for a three-year-old Traverse.

To begin with, the cost of a new Chevy Traverse without extras is: \$30,795.

The blue book on a 2011 traverse in good condition (36,000 miles) is: \$20,897.

For a lease, we pay for the expected depreciation in value. Now I know that comparing a new (2014) Traverse to a 2011 Traverse is not a precise and accurate picture of the expected depreciation, but it's pretty close. I am comparing the price of a new vehicle to the price of a three-year-old vehicle. So, to determine the amount being financed, I subtract \$30,795 - \$20,897 = \$ 9,898.

If I finance \$9,898 over three years at a 2% interest rate, I get a monthly payment of \$283.50. Sales tax is added to each payment (we will assume a rate of 8%) giving us a final payment of \$306.18. It is interesting to note that this point, this is about \$100 less a month than I was paying on my Traverse, and I believe there are two factors that account for this. 1) I did not lease the stripped down base model that I am using for this comparison, and 2) I think that the dealerships/manufacturers, when leasing a car assume the low end (as opposed to the mid range as I did in my calculation) for the depreciated value so as to assume the maximum amount of expected depreciation. In other words, not only did the car the car I had cost several thousand dollars more, the three-year value that they used for calculating the depreciation was probably several thousand dollars less, resulting in a payment closer to \$ 420 than \$306. However, let's use this \$306 figure when comparing to the payment for a purchase, as I will use the same price of \$30,795.

On a purchase, the sales tax will be financed in from the beginning rather than added to each individual payment, so using the same 8% sales tax, our \$30,795 becomes \$ 33,258.60. When that amount is financed at 2%, the payments for a three-year, four-year, five-year, and six-year term are:

• 36 month loan: \$952.61
• 48 month loan: \$721.55
• 60 month loan: \$582.95
• 72 month loan: \$490.58

Now, even when taking into account the \$100 difference that I mentioned above, it is easy to see why leasing a car looks like an attractive option financially. The three-year lease payment is considerably lower than the six-year purchase payment, so from a purely payment-oriented point of view, a lease looks good.

I have already said that my wife and I had determined that we would NOT be leasing, but how could we afford to buy two cars while keeping our payments the same or similar to the payments that we had on the Traverse and the Malibu. Our solution: start by looking for a less expensive brand of cars.