Buy Versus Lease – Savings Account or No Savings Account
So, buying a car with a loan is essentially like putting money into a declining-value savings account — you never get out as much as you put in. A portion of every payment you make is lost to depreciation and finance charges. What you have “to show” for your investment when your loan is paid off is only the part that is left over after depreciation and interest. A terrible investment by any measure. But cars are not usually purchased as investments, are they?
Leasing, then, is similar to buying, but without the equity “savings account.” You only pay for what you use and you don’t put anything extra into “savings.” It’s true that you’ll own nothing at the end of a lease; you’ll have nothing “to show” for the money you’ve put into it. But… what you don’t own is the same part of the car’s original value — the depreciated part — that a buyer too doesn’t own at the end of his loan. Again, a car’s value depreciates the same amount whether it is leased or purchased. That money is gone forever, lease or buy.
These last two paragraph’s address a common misconception when one chooses to buy versus lease because one wants to have something “to show” for their investment. In fact, if one uses a lease correctly i.e. the money saved in the monthly payment being invested into an increasing-value savings account you most certainly have something “to show” for choosing to lease.
With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing — such as paying the mortgage or buying groceries.
If a lessee has any other outstanding debt, particularly at a higher interest rate than the lease, the money saved may also be used to pay off those debts.
To summarize, leasing typically does not build equity, while buying does. The reason that a buyer has equity at the end of his loan is that he purchases that equity by making higher monthly payments. Part of each payment funds the equity. Leasing – lower payments, no equity. Buying – higher payments, partial equity.