The world has gone crazy. Natural disasters, pandemics, cats and dogs living together, my son has been cleaning his room without being told, and – and this the biggest one – leasing a car may be a financially smarter decision than buying one right now.
We’re going to take a small break so I can go shower, because I feel dirty for having just written that.
Just like there’s a time for eating peanut butter spread on cheese (trust me on this and use a good sharp cheddar), there’s a time to throw the oldest conventional wisdom in the car-buying world out the window: buy a reliable car and drive it into the ground.
Let’s take a look at why the drive-it-into-the-ground advice usually works. You buy a car and finance it for three years. After three years, you still have the car. What you don’t have is a car payment. So you can drive that car for the next 10 or 12 years at a much lower cost. Instead of handling the payment, you’re just on the hook for gas, maintenance, repairs, fuzzy dice and insurance. If you’re extra smart, you’ll continue to make that car payment to your savings account, so when it’s time to buy a new car, you’ll have enough cash to pay for it and no payment at all on your next ride.
Now, let’s take a look at leasing. Leasing is just another form of financing a car, but instead of financing the entire cost, you’re just paying for the depreciation that occurs while you’re using it. If you buy a $45,000 car, for example, you have to finance the entire $45,000 (but get to keep the car in the end). If you lease a $45,000 car that’s projected to depreciate $15,000 over the life of the lease, you only have to finance the $15,000. Of course, with both scenarios there will be some fees, but let’s keep it simple because I was a sociology major.
Because you’re only paying $15,000 to lease a car in this example, your monthly payments will be much lower than if you were financing the entire $45,000. But – and this is the kind of but Sir-Mix-a-Lot would like – at the end of the lease, you have to turn the car in. That means you’re going to have to lease or buy another car, if you want to stay on the road. So while the person who buys a car will eventually not have any payments, the person who continually leases always will.
That’s how it works out in a normal world, which is not at all what we’re living in right now. New and used car prices are at an all-time high. If you’re financing a car, that extra cost gets rolled into your auto loan. To afford the monthly payments on that loan, you’re likely going to have to extend the term of the loan. So sure, the monthly payments fit your budget, but you’re going to owe more than the car is worth for quite a while. Take the $45,000 car again. If you have to pay a $10,000 premium for it, and after three years it’s worth $25,000 you’re going to be upside down on that car. If you need to sell it or it gets totaled in an accident, you’re going to be in a rough spot.
Enter leasing. Rather than be on the hook for the entire cost of the car, plus a dealer price premium, you’re just responsible for the depreciation (note that dealers can mark up vehicles for leasing, but just because you’re leasing doesn’t mean you can’t negotiate the price or find another dealer if the one you’re working with has crazy markups). At the end of the lease, if the car is worth less than the estimated value from when you signed the lease, you’re not on the hook for the difference. In fact, if it’s worth more than the estimated value from when you signed the lease, you get that equity.
Let’s run some real-world numbers. In my area, Mazda is offering two deals on the Mazda3 hatchback this month. There’s a lease for $259 per month for 36 months with $2,499 due at signing. The lease only allows 10,000 miles per year but given that a lot of people are working from home now, that’s probably reasonable. So, with all the monthly payments and the money due at signing, the total cost for this lease on the Mazda3 is $11,823. Of course there will be taxes and registration fees, but this is a decent ballpark.
At the same time, Mazda is offering 0.9% APR for up to 36 months on the Mazda3. To make the numbers comparable we’re going to price out the same model the lease deal is for: a 2022 Mazda3 2.5S hatchback with an automatic transmission. That car retails for $23,765. With the same down payment as the lease ($2,499) and 0.9% APR over 36 months, you’re going to pay $598 per month, or $24,027 total. Now, at the end of the loan, you’ll own that car free and clear – but can you really absorb an extra $339 in your monthly budget?
If you extend the loan to five years in a bid to lower your payments, your APR is going to jump (since lenders see longer loans as higher risk). At 2.9% APR over five years with the same down payment, your total cost (less taxes and fees) will be $25,359. You’ll be upside down on that loan for about four of the five years as well, meaning that if it gets totaled or you have to sell it, you’ll need to bring cash to the table to settle the loan.
You’ll get no argument from me that financing a car for three years and keeping it as long as possible is the smarter long-term decision. But right now, with car prices so inflated, that strategy isn’t without its risks. You're essentially buying high and hoping values aren’t too low when you sell. And yes, you should budget for a new car based on total cost, not monthly payments, but be realistic. Most people have to think in terms of monthly payments because their savings simply aren’t enough to pay cash for a car.
Now, if you’re thinking you can save by buying used, I’ve got some bad news for you. A Mazda dealer near me has a used 2020 Mazda3 sedan for $21,988. A new Mazda3 sedan starts at $20,800. Buying used isn’t the value play here, especially when you consider that used car loan rates are higher than new car loan rates, and the value of that used car can’t support a loan at that price. Unless you get the deal of the century on a used car right now, the inflated price plus the higher interest rate will not only make your monthly payments higher than if you bought new, your total cost will be higher too.
One more thing: if you’re looking at an electrified vehicle, you should definitely be leasing. As battery technology improves and automakers are able to get more range from their EVs, the values of today's shorter-range EVs and plug-in hybrids will plummet. That will again put you at risk of being upside down on your loan, or unable to get a good price for your electrified vehicle when it’s time to sell. Lease a good electrified car now, buy a great one later.
This market is crazier than a Labrador in a tennis ball factory. If you want to save money, look at leasing a car as a way to wait it out. Then if the market is sane again in three years, buy a used car, finance it for as short a term as possible, and drive that one into the ground.