How much of a difference is there between leasing and buying a car?
In this video post I explain how a new car lease is similar to and different from buying a new car for each of the following categories:
Whether buying a new car or leasing there are six (6) important categories that will affect the total cost:
- Negotiated new car price
- Down payment required
- Interest rate
- Depreciation
- Sales Tax
- Fees
How to Negotiate New Car Price
Does a car cost more if you lease? No.
Negotiating the price of a new car is exactly the same whether you lease or buy. In fact I recommend car buyers do not even mention they’re leasing until after they’ve agreed to the sale price of the car. Only then should a buyer ask the car dealer to write up the purchase as a lease. If the car dealer refuses to honor that price, simply walk away. The dealer will either chase after your business, or another dealer will honor the price you just negotiated.
I cover How to Negotiate New Car Price in a separate blog post as well as on my YouTube channel: notwaitingtolive.
Down Payment and Interest Rate
How does a car buyer’s credit score affect the down payment and interest rate?
Leasing or buying with good credit shouldn’t make much of a difference. The down payment requirements will be zero or minimal, and the interest rates will be comparatively very low either way. In the car buying world at the moment good (enough) credit includes credit scores above 680.
Minimum credit leasee, those with credit scores 620 or higher may actually qualify for a lower interest rate if they lease than if they bought new. In today’s market that might mean a minimum qualified buyer might be quoted at 6% to purchase, but they may be able to lease for 2.4% at the same time. At the same time however, a lower interest rate typically requires a higher down payment for minimally qualified buyers and leasees.
Depreciation
Depreciation is the biggest component of a lease payment even though most leasees might not realize that. Depreciation is the difference between the sale price of a vehicle and the trade-in value of the vehicle at a future date. When leasing, depreciation is divided by the number of monthly payments, and is only one part of the total lease payment.
I explain the finer points of leasing on the Car Blog here on notwaitingtolive.com and address the top 11 questions I receive about leasing in this post: Leasing a Car (Know This Before You Go).
When most people talk about buying a car they’re really talking about undefined, open ended ownership.
How long do you plan to own the car?
How many miles will you drive?
What condition will you keep the car in?
If the door handle breaks are you going to fix it?
What will you sell this car for when you move on to your next vehicle?
Most car buyers do not have the answers to these questions when they buy there vehicle.
Leasing is managed ownership. All of these questions are answered in advance, which in some ways is a significant benefit to leasing. As a car salesman I rarely encountered a buyer who was happy with the trade in value of their vehicle. But when leasing this number is agreed to in advance.
For an apples to apples comparison, leasing must be compared to buying under the exact same conditions. Most often you’ll hear people talk about buying a 3 year old car and owning it for 10 years. Adding that approach is far superior to leasing. Regardless of whether that statement is valid, depreciation will roughly be about the same (usually +/- $1,000) whether you buy a car new and trade it in on the lease end date or just lease the car. The reason this logic holds up well over time is leasee have the option to sell the car on the open market, so even if a car was actually worth much more on the open market at lease end, the leasee could simply buy out the remainder of their lease and sell it on the open market for full price. The efficiency loss in that process is the difference in sales tax paid which will vary from state to state.
Sales tax
How much is sales tax when buying a car or leasing?
The amount of sales tax owed when leasing or buying may vary by as much as 100% depending on which state you plan to register the vehicle.
Some states only require you to make the sales tax payment on the depreciated portion of the car. Fewer states require sales tax be paid on the entire cost of the vehicle, whether buying or leasing.
There may be thousands of dollars at stake here which can ultimately be the difference between leasing costing more than buying a car or vice versa. Leasing can be $1,000+ cheaper compared to buying in states with the highest sales taxes. The tax savings just needs to be greater than the acquisition cost of the lease.
Fees
What extra fees are there for leasing?
There are commonly two additional fees for leasing a new car:
- Acquisition Fee: ~$400-$900+
- Turn-in Fee (Disposition Fee): $0-$500
An acquisition fee is charged by a leasing company for procuring the lease. This usually charged by the manufacturer’s financial institution, but will also be charged when leasing from third parties like U.S. Bank. In my general experience I have not found acquisition fees to be negotiable. They are perhaps the biggest downside to leasing vs buying a car because they are a significant additional fee.
Turn-in (Disposition) Fees are charged for the expense of taking in a vehicle after a lease has finished. I’ve found this fee is somewhat easy to negotiate by clearly stating you refuse to pay it before signing the lease agreement. In most situations dealers will waive a previously agreed upon turn-in fee for a lease when the client leases again from the same dealership.
What else do you need to know about negotiating the best car price?
Leasing a Car (Know This Before You Go)
You don’t know what you don’t know. On my YouTube channel and car blog I’ve created all the self help videos you need to negotiate the best new and used car prices on your own for free.
But I know people will still pay for help buying a car for 3 reasons:
Save the stress, anxiety, an uncertainty of negotiating on your own
Learn from someone with experience negotiating the best car prices
Save time buying the right car for the best price
If you fall into one of those three categories you can get my car buying help by following this link: https://notwaitingtolive.com/help-buying-a-car/
I recommend the following videos to best negotiate your next vehicle purchase.
How to Make Lowest Initial Offer in Used Car Negotiation
How to Make Lowest Initial Offer in New Car Negotiation
How to Best Negotiate Used Car Price
How to Best Negotiate New Car Price
How to Best Negotiate a Lease
How to Lease a Car (11 Frequently Asked Questions)
How to Negotiate by Email
Cash Buyers Pay More (What to Say to Save Money)
Online Car Buying (How Much Are You Overpaying?)
The Story of the Biggest Discount I Ever Gave As a Car Salesman
How Much Car Can You Afford? (The #1 Rule to Know)
5 Myths About Buying at the Car Dealership
How to Sell a Car For Sale by Owner
Buying a Car Out of State (4 Things to Know Before You Go)
New vs Used vs Very Used (What’s the Real Cost of Ownership and Best Time to Buy?)
Scotty Kilmer 5 Used Cars You Should Buy
What Happens to Unsold New Cars