Why would you still borrow money to buy a car if you can lease one at a lower cost? This is the common thread throughout most marketing campaigns of lease companies and car dealers who offer private leasing. But is renting a car for private use really a cheaper alternative for medium to long term?
The numbers next to each other
For her first car, 23-year-old Annabelle Moore has a brand-new Opel Corsa in mind with a purchase price of $ 14,000. She is considering the following two options:
- 1. Enter into a 4-year private lease contract with the Opel dealer. For this she will have to pay a fixed lease amount of $ 260 every month. The annual insurance, regular maintenance of the car and any repairs are at the expense of the company. In 4 years she will pay $ 12,480 to the car dealer.
- 2. Take out a 4-year car loan with her bank for an amount of $ 15,000 (car price + insurance for 4 years). The bank offers her an APR of 5 percent, which brings the monthly repayment to an amount of $ 345. In 4 years she will pay $ 16,560 to the bank.
For this period, Annabelle Moore with a lease contract will indeed have fewer costs to drive around in an Opel Corsa. Hereby she experiences as an additional financial advantage that she will not have to spend on service, take changes, etc. All together, she will save around $ 5000 less in 4 years.
After the lease or loan agreement has expired
However, the current balance can only be drawn up after the lease contract has expired or the car loan has been fully repaid. With a private lease, the Opel Corsa has to go back to the car dealer. At that time, Annabelle Moore can decide if she wants to conclude a new 4-year lease contract for a 2020 model, for which she will again pay $ 260 per month (for the sake of convenience, any inflation is not included).
If she buys the car through a loan, she has two options
She can use the residual value of the 2016 Opel Corsa with a new 4-year loan to buy a brand new model. The average depreciation on cars over 4 years is 40 to 45 percent, which means that the old Corsa will still be worth around $ 8,000. She only has to go to the bank for $ 7000 (including 4 years of insurance), for which she will have to pay $ 160 a month. Annabelle Moore can also decide to continue driving in her old Opel without fixed monthly expenses, with only the annual liability insurance, service and possible repairs as costs.
From a purely economic point of view, borrowing (buying) will always remain cheaper than leasing (renting). The initial saving that a private lease generates on a monthly basis is ultimately lost against the fact that you own the car when you borrow it. After the term, the residual value of the car is entirely yours. In the example above, this is $ 8,000, while the lease agreement only provides a total saving of $ 5,000.