When deciding to get a car, you have two choices: owning or leasing. Each option has its own benefits and drawbacks. In this blog, we will show which example shows an advantage of owning a car over leasing one. Owning a car means you eventually stop making payments and have a valuable asset. Leasing, however, means constant payments without ever owning the car.
We will use an example to highlight these points. Over time, owning a car can save you money, let you drive as much as you want, and allow you to customize your vehicle. This example will help you understand why owning a car might be a smarter long-term decision.
Understanding Ownership and Leasing
Before diving into the example, let’s briefly explain what owning and leasing a car entail.
Owning a Car:
When you own a car, you either pay for it in full upfront or take out a loan to cover the cost. When you take out a loan to buy a car, you make monthly payments until the car is fully paid off. Once paid off, the car is entirely yours.
Leasing a Car:
Leasing is like renting. You make monthly payments to use the car for a specific period, usually two to four years. At the end of the lease, you return the car to the dealership. You don’t own the car unless you choose to buy it at the end of the lease term, which usually means paying the car’s remaining value.
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The Example: Cost-Effectiveness Over Time
To clearly demonstrate the advantage of owning a car over leasing one, let’s consider an example involving two friends, Alex and Jamie.
Alex Owns a Car:
- Initial Purchase: Alex decides to buy a car worth $20,000. He makes a down payment of $4,000 and takes out a loan for the remaining $16,000. His loan term is five years with a 4% interest rate, resulting in every month payment of about $295.
- Monthly Payments: For five years, Alex makes monthly payments of $295. Over the five years, Alex spends $17,700 in total on his car loan ($295 x 60 months).
- After Five Years: Once the loan is paid off, Alex owns the car outright. He no longer has monthly payments, just the costs of maintenance, insurance, and other operating expenses.
Jamie Leases a Car:
- Initial Lease: Jamie leases a similar car worth $20,000. He agrees to a three-year lease with a monthly payment of $300.
- Monthly Payments: For three years, Jamie makes monthly payments of $300, totaling $10,800 ($300 x 36 months).
- End of Lease: After three years, Jamie returns the car to the dealership. He decides to lease another car, repeating the process. Over the next three years, Jamie again pays $300 per month, totaling another $10,800.
- After Six Years: Jamie has spent $21,600 on lease payments ($10,800 + $10,800) and still does not own a car. He must continue to make lease payments if he wants to keep driving.
Cost Comparison:
- Alex: After six years, Alex has spent $17,700 on his car loan and owns the car outright.
- Jamie: After six years, Jamie has spent $21,600 on lease payments and does not own a car.
Savings:
- Over six years, Alex has spent $3,900 less than Jamie ($21,600 – $17,700). Moreover, Alex owns a car that still holds some value, while Jamie has no asset to show for his payments.
Additional Advantages of Owning a Car
Beyond cost savings, owning a car offers several other benefits:
- No Mileage Restrictions: Lease agreements often include mileage limits, usually between 12,000 to 15,000 miles per year. If you exceed this limit, you pay extra fees. When you own a car, you can drive as much as you want without worrying about extra costs.
- Customization: Car owners can modify their vehicles to suit their tastes and needs. Whether it’s adding a new sound system, changing the paint color, or installing a roof rack, owners have the freedom to personalize their car. Leased cars must be returned in their real/ original condition, with minimal alterations allowed.
- Long-Term Financial Benefits: While owning a car requires an upfront investment and initial higher costs, it becomes more economical over time. Once the car is paid off, the owner only has to cover maintenance and insurance, whereas a lessee continues to make regular payments indefinitely if they keep leasing.
- Equity: Same as owning a home, owning a car means building equity. Although a car depreciates over time, it still retains some resale value. If you decide to sell or trade in your owned car, you can use its value towards purchasing another vehicle. Leasing does not provide this benefit.
- No End-of-Lease Hassles: At the end of a lease, you must return the car and may face charges for excessive wear and tear. This can be stressful and costly. Owning a car eliminates this concern, as you can keep the vehicle as long as you want.
When Leasing Might Be Better
While this example shows the advantages of owning a car, leasing can be beneficial in certain situations:
- Lower Monthly Payments: Lease payments are normally lower than loan payments for a same car, which can help if you have a tight budget.
- Driving a New Car Frequently: Leasing allows you to drive a new car every few years without the hassle of selling the old one. This is appealing if you like having the latest features and technology.
- Maintenance and Warranty: Leased cars are usually under warranty for the duration of the lease, reducing the cost of repairs and maintenance.
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Conclusion
While leasing a car can offer lower monthly payments and the pleasure of driving a new vehicle every few years, owning a car presents clear financial advantages in the long run. As illustrated by the example of Alex and Jamie, ownership can lead to substantial savings, freedom from mileage restrictions, and the benefit of owning an asset.
Understanding your personal needs and financial situation will help you make the best choice. However, if long-term savings and building equity are important to you, owning a car might be the better option.