Is Leasing Ever Cheaper Than Buying?
By Tom Butcher
How did you pay for your car?
Were you one of the lucky ones who could handover the exact cold, hard cash in full? Or were you like the 84.5% of drivers who used some type of finance to get their car?
Cars obviously don’t come cheap and buying one outright is out of financial reach for most people in the country thanks to sluggish wage growth.
There’s more to car finance than just your standard Hire Purchase agreements though.
Drivers are starting to discover other ways of getting access to a car though, besides just owning it outright. Leasing is one of these. While huge in the US and Germany, leasing is still a niche option in much in the world — but it is growing.
Leasing is often touted as being a cheaper solution to buying — but is there any truth behind the hype? I decided to do some digging and find out.
Leasing vs buying
First, let’s make sure we understand what we’re talking about.
Without stating the obvious, it’s probably a given that you know what I mean when I saying ‘buying’– becoming the legal owner of an item. When you become the owner of a car, you alone have the right to sell it and make it money from that sale.
Leasing is slightly different though and probably needs an explanation. Let’s turn to our old friend Wikipedia.
“Vehicle leasing is the leasing (or the use) of a motor vehicle for a fixed period of time at an agreed amount of money for the lease. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a method of acquiring (or having the use of) vehicles for business, without the usually needed cash outlay.”
During the time you lease the car you won’t be the actual owner of the car, you’ll just be its registered keeper. You’ll be responsible for keeping it roadworthy but you won’t be able to sell it (so, you won’t be able to make any money from it).
So, let’s look at the numbers behind this before we delve into the arguments. After all, comparing the evidence of both types of car finance is probably the only way we’re going to get a decent understanding of which is cheaper overall.
(Note: I’ve sourced all of the prices below online, and used real quotes to try and keep this as accurate as possible.)
For argument’s sake, imagine two twin brothers: Matt and Francis. Both obsessed with the Audi A5. Matt decides to buy one and Francis decides to lease one. They’re both after exactly the same specification: a basic five-door hatchback with a two-litre engine.
Matt: the buyer
Matt can’t afford the £32,995 price tag of the basic Audi A5, but he wants to own it all the same. He decides to get some car finance and chooses a standard Hire Purchase agreement where he pays off the full value of the car in monthly installments.
Here are his terms:
- 35-month contract
- Paying £1,008 a month
- Initial deposit of £2,067
- 9.9% APR Representative
Market price of car: £32,995
Total paid back through HP: £37,340
Francis: the leaser
Francis can’t afford the £32,995 upfront either, so he decides to lease the car. He chooses a standard Personal Contract Hire agreement, where you effectively rent the vehicle for a period of time and then give it back.
Here are the terms:
- 35-month contract
- Paying £485 a month
- Initial payment of £1,455
- No APR
Market price of car: £32,995
Total paid back through PCH: £18,429
Next, I ran the type of car, the price of it and how long I’m going to wait until I’m the owner of it through one of those car depreciation calculators you can find all over the internet.
Basically, the car will lose an average of 47% of its value in the time you’re in the agreement. That means that at the end of the period, it will be worth £17,627 – a loss in value of £15,368. Ouch.
So, here’s the takeaway if you haven’t really been following the numbers. In the above scenario, you’ll effectively lose £15,368 by buying a car rather than leasing.
Losses like that should make any person buying a car as an investment keep their hand on their wallet to be honest.
The expert view: The case for buying
So, after doing some research into the respective prices for leasing and buying an average family car, I decided to reach out to some experts in the field to find out what they thought about the leasing vs. buying debate, in terms of which was cheaper.
Let’s start with the case for buying.
Lou Carlozo sets out the pro-buying argument in this article for Money Under 30. In the article, he says:
“[W]e have to remind you that, financially, the best way to buy a car is to pay cash for something pre-owned to avoid paying both interest and off-the-lot depreciation.
“Another member of the Financial Literacy Commission, Clare Levison, notes that car payments will eventually end, whereas lease payments won’t until you turn in the car. “With buying, eventually you will have paid the car off and no longer have the expense of the monthly payment.””
So that, in a nutshell, is the advantage of buying. You make your monthly payments until you’ve paid off the total and then the car is yours forever with no more payments to worry about. (Well, almost.)
The expert view: The case for leasing
So, why would you decide to choose leasing over buying?
Will Craig, CEO of LeaseFetcher, a car leasing comparison site, thinks that depreciation is a major reason why so many people are turning to this form of car finance.
“Buying isn’t all it’s cracked up to be. Depreciation means that cars will plummet in value in the first few years you own them.” he tells me. “That means you can find that your car is worth half of what you’ve paid for it when your finance agreement finishes– which isn’t a exciting prospect if you’re planning on breaking even when you end up selling the car.
“A car lease is probably one of the easiest ways to get your hands on a new, top-end car for a relatively small monthly payment, so it’s not surprising that so many people have been turning to it instead of buying.”
So, you can probably see from the figures and from the industry view, that leasing is seen to work out significantly cheaper than buying a lot of cases. The main reason for this is depreciation.
Unfortunately, cars aren’t like most investments that you make– they don’t hold their value particularly well. And that’s a polite understatement.
Cars lose value incredibly fast– literally as soon as you drive it off the forecourt, or it gets delivered on to your drive. The AA estimate that a car loses about 40% of its value in the first year of its life for instance, and that it continues to lose it whilst you’re owning it.
The important thing to bear in mind is that your monthly car finance repayments won’t be getting any smaller– unlike the value of your car. With car finance repayments, like HP or a loan, you’re effectively paying off the entire value of the car each month. With leasing, on the other hand, you’re only paying off the value that the car is expected to lose whilst you’re owning it. This means that it works out loads cheaper in the long run.
So in terms of whether leasing is ever cheaper than buying, I’d like to follow my freelance journalist nose, be balanced and say that both are the same, but that wouldn’t be true. In all honesty, the exact type of arrangement that’s best for you will depend on the type of person that you are– and personally, I think leasing is often a lot cheaper than buying.