Lease vs. Buy: Why not Both?

The question of whether to lease or buy your next car can always be a little tricky. Of course, most experts on the subject will advise you that it depends on your financial circumstances and goals, and to “run the numbers” with a Lease vs. Buy Calculator, suggestions that you should definitely heed. But here’s a slightly different spin on the matter, a little something extra that you may want to add to the mix.

If your main purpose in leasing is to drive a new or nearly-new car year after year, then this probably won’t apply to you. But if you’re looking to own a somewhat more expensive car than you might normally be able to purchase, consider this: because of the general oversupply of cars of all kinds, from all manufacturers, it’s likely that rebates and discounts will continue to be offered for the foreseeable future. And although sticker prices continue to rise (just like prices on everything else), carmakers are offering lease deals that can’t be beaten. At the end of the lease the company financing the transaction will likely sell the vehicle on the open market if you don’t purchase it. However, it will probably sell at a loss to the company because they’ve initially inflated the car’s residual value (the amount that the car is worth at the end of the lease) unrealistically. So instead of someone else getting a great deal, why not buy the car yourself and transfer their loss into your bank account as money saved?

Lease deals usually reflect discounts by being “subsidized”. To do this, at the beginning of the lease the financing company increases the estimated residual value of the car. Calculating lease payments using a higher residual value makes the lease price more attractive than those of competitors, thus lowering the monthly lease payment.

Because of the abundance of cars available, and due to the fact that labor contracts are a huge expense for car manufacturers in the U.S., it is imperative for the car industry that they move vehicles. Increasing residual value to lower lease costs is a strategy that’s been used for years to lease (or “sell”) more cars, and it’s likely to continue. However, the market value of the off-lease vehicle has almost always been less than the contracted residual value and the vehicle was sold in the wholesale market, many times at a loss of several thousand dollars. A number of major lease financiers, including Chrysler, some New York banks, and others have each lost several million dollars in recent years due to this fact.

The labor contracts of automakers include major financial benefits, health and welfare compensation, and pension obligations for current and retired employees. Added to that is the fact that there are many more manufacturing plants worldwide that are making cars. And if China’s automobile industry enters the U.S. market in the near future, (as has been proposed) with a vehicle built using Chinese wages, the situation is likely to only get worse. At least, for the automakers; this continued trend is an advantage to the car-buying public. The glut of new cars will likely persist and subsidized leases will continue to be offered for the next few years at least.

So if you want to ultimately own your dream car, minimize its cost by leasing it first. Let the finance companies subsidize your monthly payment. Several months before the lease is up, check the used car lots and find out what your car is being offered for. Then at lease end, buy the car and save yourself several thousand dollars.