First, thank you to everyone for sharing your knowledge. I’m new to leasing and frankly don’t have the grasp of all of the concepts that I’d like to. Your knowledge is invaluable.
I see some folks comment that some cars are better to buy versus lease. I THINK the basis for that is cars that are high MSRP that depreciate significantly over the first 3 years. Vehicles that are not known for good reliability may be in this category as well.
What’s the best way to identify vehicles that fit in that category versus ones that should be bought?
Math. You need to do a comparison of total cost of ownership between leasing and purchasing, and then compare then factor in the value of offloading depreciation risk to the bank.
One of the TH’s has a response to this that I’ve seen on here a few times. The breakdown is essentially you are looking for a good combination of the variables that go into a lease.
Ideally a high rv, low mf, decent dealer discount, a decent amount of incentives will make a favorable lease.
A really low rv or a really high mf are two things that you are almost never going to be able to overcome with the other variables being favorable.
My feeling on this is that when you commit to leasing or buying a new vehicle, you’re already exposing yourself to the most severe portion of that vehicle’s depreciation curve. Whether or not you lease or buy may matter to an extent, but ultimately you will incur the most financial penalty being in a new car. That’s why LH loves “fart cars” they’re basically short term rentals that are all beat up, so they transact at a stiff discount but still get the normal automaker’s residual.
Where people see “savings” is their willingness to operate an older vehicle. Once a lease term ends, the leasee can purchase the vehicle for the residual and keep driving it. This will “save money” than if the leasee enters into an new lease at that time.
Similarly, if someone finances a vehicle with a loan day one, they will benefit most if they remain in that vehicle for over 3 years. If that person simply sells their 3 year old vehicle to cycle back into a new vehicle with a new loan, they aren’t saving much money.
Ignoring EV’s for a second, the simplest way to decide lease vs buy is to look at the money factor vs the APR of a financed loan. If the MF is subvented (something like 0.0015 or less in today’s climate) and there are no loan subventions, it’ll make more sense to lease to get the lower interest rate.
If the MF and loan APR is similar, I would recommend leasing. This is because a lease does not require the person to make principal payments, and the lease has lower monthly payments. If the person uses a loan, they will “build equity” in the vehicle, but equity in your vehicle is a bad thing. Because the opportunity cost of that equity is stuck in the vehicle, and isn’t cash available for use or investment.
Remember, the leasee has the option to keep the vehicle. They can turn a lease into a financed-loan product at any time to capture equity upside for themselves. Or shed the lease if the residual is underwater. But a loan user can’t convert back into a lease. They are always exposed to the depreciation with no outlet.
Optionality is valuable. Lower opportunity costs is valuable. Leases are valuable to the right user.
If the MF is absurdly high (like if you try to get a G-Wagon), leasing makes no sense. And of course if the lease MF is very low, go with the lease.
For for some EVs, the $7,500 pass through credit initially favors the lease. But then the leases themselves often have very high money factors to offset the benefit (see Mazda and Volvo programs). In those situations it makes sense to lease first then buy-out the vehicle with a loan.
For some other EVs, the residuals in real life are a disaster… so the lease residuals are subvented by the automaker (see the EQS and Audi eTrons). It makes zero sense to ever risk being exposed to that depreciation
TLDR, leasing vs buying new vehicles boils down to the MF vs APR comparison and how the specific use case may be impacted by residuals. If you want to save money, keep operating a vehicle well past the normal lease term.
Here’s more information about how to use the LH calculator to do a simple lease vs buy comparison (doesn’t yet factor in opportunity costs or repair/maintenance costs)
This, plus… certain brands (Toyota, Honda, Subaru) often have high resale value in the real world (which is not correlated w/ a correspondingly high RV set by the bank) and don’t necessarily have anticipated expensive maintenance costs that occur in yrs 3-6 (depending on your mileage). So the math often doesn’t work out in favor of a lease.
A great lease is a no-brainer; it’s just immediately obvious that repetitive leases of that nature are cheaper overall than ownership. Those are typically the ones in Signed Deals & Tips
Beyond that “good” becomes more murky. You have to ask yourself how much extra you’re wiling to pay to put a brand new car in your driveway every 3 years as opposed to a lower annualized cost by owning for 4-5 years at a time.
It’s easy to fall for the fallacy of comparing, in isolation, a 3yr lease against 3yr ownership. But that’s nonsense. There’s no rule that ownership has to be defined by what some bank chose as their marketing tactic for their leases. Ownership cycles can be 4, 5 or 6+ years. Warranties can be extended and unpredictably of costs can be taken out of the equation. Trading can have tax advantages in most states.
