To Buy or Lease a Car? That is the Question

Suze Orman writes a column for O, The Oprah Magazine on personal finance, so presumably she knows something that Oprah Winfrey‘s readers don’t.  Here’s what she says about the question of whether to buy or lease a car:

The Buy vs Lease Decision

You Auto Think Twice About Leasing a Car

By Suze Orman

It drives me nuts to see all the money wasted on car leases.

In my opinion, leases are a drug for status-conscious people who need the rush of driving a “nicer” car than they can really afford. The auto-financing folks have basically perfected a way to let you think you can have your cake and eat it too. Can’t afford to buy a BMW or Lexus? No problem, just lease it!

Well I am here to tell you it is a very big problem… .

Read more from Yahoo Finance.

By contrast, Mark Solheim at Kiplinger’s finance says that people have preconceived ideas about leasing he calls “myths”:

Five Myths on Leasing a Car

The truth about five common car leasing myths.

By Mark Solheim, Senior Editor

Leasing often gets a bad rap, and no wonder: Its confusing argot sounds like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car buyers who simply wanted low monthly payments.

Read more at Kiplinger’s Finance

Lastly, here’s advice from certified public account (CPA) and video journalist Stacy Johnson that actually attempts some math:

In Johnson’s view, buying is usually less expensive, but he doesn’t go into the details.  He thinks the math is too intimidating for most viewers, and he advising using an on-line calculator (although it’s not clear what you’re supposed to do with the on-line calculator).

In my opinion, Orman, Solheim and Johnson are all full of baloney. Even Khan Academy, which brands itself as the website where you can “Learn almost anything for free” comes up empty on the topic of buying vs. leasing a new car.  

As it turns out, this is one of the most complicated finance problems that most people will confront during their lives, and the vast majority are ill-equipped to understand it (including experienced car dealers).

This series of videos is intended to break down the choice of leasing versus buying a car using the tools of engineering finance.  The first video begins drawing exemplary cash flow diagrams that allow comparison of the options.
This video completes the cash flow diagram for the lease option, and shows the equations necessary to compare the buying vs. leasing options on a net present value basis.
This video explains how a new car lease looks from the perspective of the leasing company and explains the risk that the leasing company accepts regarding the residual value in the lease agreement (or book value) and the market value of the used car at the end of the lease.
The last video compares the cost of buying with leasing a new car.  It concludes that, even in cases where leasing is more expensive, having the option to put the car back on the leasing company at the end of the lease term reduces risk, which may justify the increased expense.
In general, drivers with high discount rates (such as high-rate credit cards) will be better off leasing a vehicle for several years, even if they intend to buy it at the end of the lease term!  This fact is often overlooked by personal finance “experts” that write advice on buying vs. leasing.  This might be because the experts believe it is unlikely that someone with high-rate credit card debt will have the discipline to use the money saved on car payments to pay their debt down.

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