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Course: Personal finance > Unit 7
Lesson 1: Buying vs. leasingWhen leasing might come out better than buying
Reviewing a scenario where leasing a vehicle could make more sense than buying. Created by Sal Khan.
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Leased vehicles require a higher insurance policy as well. I'd say it never makes financial sense (except perhaps using it in a business). One instance, like you mentioned, is if you don't want the hassle of selling a car and always want a new one. Also, sometimes maintenance might be included in the lease price because it's in the dealership's best interest to keep the car in good condition.
Otherwise, buying a used car is makes the best financial sense. Especially a car with low miles but high year. For example, if found a 5 year old car with 24,000 miles, you'd likely pay half only half of retail value while the car has only gone through about 24% of its life. (Usually after 100,000 miles, cars will start to need major repairs.)
I think it's also worth noting that if you cannot afford to pay for the car outright, you shouldn't be buying it. Unless of course you will be using the vehicle to make money.(12 votes)
The main problem with a leased car is the mileage restriction--you're very likely going to drive over 12K miles/year unless you live in (meaning not in a suburb or whatever), work in, and shop in a big city.
For example, in Los Angeles County, it's almost never a good idea to lease a car unless it's a business expense.(4 votes)
I have a question on the buy scenario when considering the option of selling your car in the future. What if you decided not to sell the car on a private market, or just simply sell it back to dealer but did a trade-in? My family has done that once or twice with our vehicles. We’ve had 3 Chevy Suburbans over the years and every time we wanted a new one we’ve brought the current one in to the dealer, got an appraisal and then used that to deduct the price off the new one. Wouldn’t that still make buying better than leasing?(2 votes)- You should be using a car-buying service like Costco, AAA, or even Consumer Reports. And make sure you're getting "fair value" for the trade-in. Most dealerships only do trade-ins if it's in their financial interest, which sometimes means you may not get the best deal.(5 votes)
What if the leased vehicle got damaged in some way while I was using it for the 3 years? Can I still return it just the same?(3 votes)
Like Sal mentioned in the previous 'Buying vs. Leasing a Car' video, where he talks about going over the mileage limit and having to pay a few cents extra per mile after that--I'm guessing vehicle damage would be something noted on the lease agreement. There might be a fee in place for that.(3 votes)
The one thing that you can't control in a lease agreement is what they call 'excessive wear' which is often due to a faster than originally calculated depreciation. The example that you used assumes that the car company estimated the resale correctly and that the leasing company isn't going to gouge you.
The one case that I know of where leasing made sense is where the projected resale at turn in was much lower than the actual resale at lease end. This happened with the first generation of Lexus LS models. People actually bought the car at lease end, then sold it for a profit. That is not likely to happen again.(3 votes)
What happened with the ownership tax´s car? When you buy it, I assume you have to pay a tax every year and may be it depends on car`s characteristics (model, year, etc) but my doubt is about the leasing, because the owner is the dealer so we also pay the tax ownership or a part of it when we leasing the car?(2 votes)
No question for this video(2 votes)
i think that buying a car in cask is always going to be the cheapest option lets say that you put payments on any car you should at least try to buy it out right(1 vote)
Not necessarily. You might get very low cost financing _ possibly even 0% - while being able to earn (let's say) 5% dividend on stock you own. On the other hand, lots of cars that you can buy with 0% financing might not be worth spending good money on.(2 votes)
Video transcript
I have my friend Matt here. He just saw the video I made upon leasing versus buying the subcompact car. You had a question. Yes, Sal. So I see from the video that it makes sense to buy the car in both those scenarios you went through. But does it ever make sense to lease a car? Yeah, I was actually thinking about that myself when I went through it. Okay, under what scenarios? In that video I kinda threw out the idea that, oh, well, maybe there are reasons from a tax point of view, if you're a small business owner or you're a salesman and a car is essential for your business, you might be able to deduct the lease. That's a subject for another video, but let's say you didn't have that. If you're just, it's not a business expense in some way, one thing that you could think about, if you're gonna keep the car, it's hard for me to imagine scenarios where buying doesn't win over leasing, but maybe there are some that people could think of. If you're going to give up the car, if you think you're going to give up the car on a regular basis, in that video we had the buying still came out better. But a big part of the reason why buying came out better was based on this assumption of what the resale value of the car actually is. I assumed here $12,000, and actually I did try to estimate for the subcompact car based on its historic depreciation, but this $12,000 was based on the private market. And to sell something on the private market you gotta post something on the internet, people come to you, you have to do some work in order to sell your car. If you just wanted to sell it to a dealer, they're not gonna give you this $12,000. They'll give you something less. They'll maybe give you, say, they'll maybe give you $10,500, actually seemed like the likely price. So if we make this $10,000, if we make this $10,500, then the giving up the car scenario is gonna be $18,740 minus $10,500. It gets us to $8,240. $8,240. So in this scenario, if we make these different assumptions where you just trade it into the dealer and you don't get as much for it, but you just did it because you wanted an easy transaction, it actually comes out that hey, maybe for these numbers, not always, but for these numbers, that the lease could actually make a little bit more sense. Yeah, absolutely. I can see where that, in this case, it would make sense to lease versus buy. Cool.