When you decide to get a new car, whether you choose to lease or buy, you’re immediately facing the steepest part of its depreciation. The real question isn’t necessarily lease versus buy in isolation, but rather how to navigate this initial financial dip effectively. Enthusiasts often look for “fart cars”—vehicles that have already taken a depreciation hit and are available at a significant discount, yet still retain some of their original value. These can be seen as short-term, cost-effective solutions.
The perception of “saving money” in car ownership often comes down to how long you’re willing to drive a vehicle. For instance, when a car lease ends, purchasing the vehicle at its residual value and continuing to drive it will appear more economical than starting a new lease. Similarly, financing a car and keeping it for more than three years is typically more financially sound than constantly trading in for a new model every few years and taking out new loans.
Ignoring electric vehicles for a moment to simplify the comparison between leasing and buying, a key factor is looking at the money factor (MF) in a lease versus the annual percentage rate (APR) of a car loan. If the money factor is significantly subsidized—say, around 0.0015 or less in today’s market—and loan rates are not, leasing might be the more attractive option due to the lower interest equivalent.
If the money factor and loan APR are comparable, leasing still holds advantages. Leases generally have lower monthly payments because you’re not paying off the principal vehicle cost, just the depreciation and interest. While a loan builds “equity” in the vehicle, this equity isn’t always beneficial. The opportunity cost of having your funds tied up in a depreciating asset like a car means that money isn’t available for other investments or uses.
Remember, a lease provides flexibility. At the end of the term, you have the option to buy the car, effectively converting your lease into a financed purchase if it makes financial sense. Or, you can walk away if the residual value is higher than the car’s market value. However, if you finance a purchase, you’re always exposed to depreciation without the same exit strategy.
Optionality and lower opportunity costs are key benefits of leasing, making it valuable for the right person under the right circumstances.
Of course, leasing isn’t always the best route. If the money factor is excessively high, such as with luxury or high-demand vehicles like a G-Wagon, leasing becomes less sensible. Conversely, exceptionally low money factors make leasing very appealing.
Electric vehicles (EVs) introduce another layer of complexity. Initially, incentives like the $7,500 federal tax credit might favor leasing, as these credits are often passed through to the consumer in leases. However, lease programs for EVs sometimes come with inflated money factors to balance out these incentives, as seen with some Mazda and Volvo programs. In such cases, a strategy might be to lease the EV to capture the immediate incentive, then buy out the lease with a loan.
On the other hand, some EVs are experiencing rapid depreciation, leading to unexpectedly low residual values—as seen with models like the Mercedes-Benz EQS and Audi e-Tron. In these situations, automakers may artificially inflate lease residuals to make leasing more attractive. In such scenarios, taking on the depreciation risk of ownership might be unwise, and leasing becomes a more financially sound approach.
In summary, deciding between leasing and buying a new car hinges on comparing the money factor against loan APR and understanding how residual values and depreciation impact your specific situation. For those looking to maximize savings over the long term, keeping a vehicle well beyond the typical lease term remains a solid strategy.
For a more detailed comparison, tools like the LH calculator can help evaluate lease versus buy scenarios, although they may not fully account for opportunity costs or long-term maintenance expenses.
