Does Car Leasing Still Make Sense When Compared to Low-Payment Long-Term Loans?

When considering whether to lease or buy a new car, cost comparison is a primary and important factor.

In these articles, we often discuss the fact that leasing produces significantly lower monthly payments than buying with a loan, but we usually compare a typical 36 month lease with a 36 month loan for the same vehicle. This analysis shows that lease payments and costs are roughly half of buying a car with a loan.

However, 36 month loans are not typical because payments are usually too high for most buyers. As automotive consumers strive to get the lowest possible payment, they opt for longer and longer loan terms of 48, 60, 72, and even 84 months. This can often result in loan payments as low, or lower than 36 month lease payments.

So, does this mean a long-term loan is better than a typical 36 month lease?

We’ll let the numbers do the talking. as shown below. We compare a 36-month lease with several different loan terms for the same vehicle. We assume a $30,000 vehicle, no down payment or trade, a 5.5% interest rate, and a 6% sales tax rate. For the lease we assume a 55% lease-end residual and that the 6% sales tax is paid with each monthly payment, which is how it’s done in most states.

What can we conclude from the numbers in the above table?

  That it would require a long 72-84 month loan to get about the same monthly payment as a 36 month lease. At 72-84 months, the manufacturer’s warranty will have long expired, unlike with the 36 month lease, which means that potential repair costs should be included into the cost of a long loan.

  That finance charges in a long-term lease are significantly higher than for a lease. The longer the loan, the larger the finance charge amount. The higher the interest rate, the greater the effect.

  That there are considerable sales tax savings (in most states) with leasing since it’s not required to pay tax on the entire vehicle’s value in the beginning (as with a purchase), only on monthly payments, thereby spreading out the tax burden.

  That the total cost of leasing, compared term for term, is roughly half that of a long term loan. In fact, one could lease two brand new cars back to back, at 36 months each, for about the same total cost as buying one car with a 72 month loan.

 Are there other considerations?

As more automotive consumers move to longer and longer loan terms, they often don’t realize that that it typically puts them into an “upside down” situation for almost the entire term.

This creates a problem when those people want to sell or trade early, as they often want to do with such long loans. It also creates a potentially large financial issue if the vehicle is stolen or totaled in an accident. This is due to the fact that insurance will only pay for a vehicle’s market replacement value, not the amount still owed on the loan — which could be a difference of thousands of dollars. GAP insurance, which provides protection in such situations and comes free with most leases, is often not available for loans, and certainly not for free.

Another potential issue with long-term loans is that lenders require full-coverage insurance, same as for leases, but paying for expensive insurance for as long as 84 months may not be on the radar for consumers who are only looking at lower monthly payments. Furthermore, a 72 or 84 month loan far exceeds most manufacturers’ new-car warranties, exposing buyers with expensive repairs after the usual 36 months. Considering that at 84 months, a car will have over 100,000 miles (at an average 15,000 miles a year), long past the point at which problems can begin appearing. Most people don’t like making payments on a 7 year-old car with expensive problems.