Personal Finance

Time for a New Car, but Should You Buy or Lease it? Understanding Buying vs. Leasing

by Max Kirouac CFA® – Investment Counsellor, BMO Private Banking

Summary: Buy or Lease A Car

The decision to buy or lease a car is often oversimplified; it depends on your personal circumstances and the cost of each option. Vehicle ownership is discretionary and your car shouldn’t stretch your budget.

I remember a tweet that Dwayne Johnson sent out years ago that made me scratch my head:

“Trust me…never buy a depreciating asset. If it drives, flies, or floats – lease it!”

This is a restatement of the idea that you should always buy appreciating assets and always lease depreciating assets. Of course, this makes sense in theory, but without the benefit of foresight, we can’t definitively know what assets will appreciate. There are also personal constraints related to liquidity to consider. The finance industry has always thrived on making simple things seem complicated and complicated things seem simple.

The Rock has been wildly successful by any definition of the word, but I don’t know if he is qualified to offer advice like this. Fortune 500 companies dedicate their accounting departments to determining whether they should lease or purchase assets; I think this decision deserves more thought than The Rock put into crafting this tweet. So what is the optimal decision between buying and leasing?

For the sake of mass applicability, I’m going to focus on the buy or lease a car decision. I’ve previously written on renting vs. buying when it comes to housing. While homeownership is often viewed as an investment as well as a lifestyle decision, the same argument can’t be made for vehicles. With the exception of rare collector’s items kept in mint condition at considerable expense, vehicles rapidly lose their value. While some of the statistics behind value erosion are exaggerated, it is safe to say that a new car will conservatively lose 10-20% of its worth during its first year on the road.

The cost consideration

While a car isn’t much of an investment, the decision between buying and leasing is more nuanced than The Rock would lead you to believe. The most obvious point in favour of owning a vehicle: depreciated or not, you still own an asset at the end of the day. Leasing, like renting an apartment, does not build equity. Your payments provide you with a vehicle to drive for the life of your lease and nothing further. Lease payments will be lower than car loan payments because the dealership will own the residual value of the vehicle at the end of the lease term. Determining the optimal decision from a cost perspective would require a net present value calculation with considerable estimates of variables (residual value of the vehicle, ongoing maintenance costs, etc.). This is almost impossible to determine in advance, as some vehicles are known to “hold their value”, but if you buy a lemon, you won’t be protected by brand quality.

Personal circumstances

This decision has an emotional consideration as well. For many people, pride in ownership extends to vehicles. Further, as you don’t own the asset, the dealership can put additional constraints in place. For example, most leases will dictate the maximum number of kilometres that you can put on the vehicle in a year. Personally, I prefer leasing for the same reason that I prefer to rent an apartment know what my monthly vehicle expense will be and I can build my budget around it. Depending on your lease term, the vehicle will likely be under the manufacturer’s warranty for the life of the lease. As maintenance costs tend to increase for older vehicles, it can add to the costs of ownership toward the backend of a vehicle’s life when it is no longer under warranty. The buyout option on leases further fixes your costs, as a lease contract will stipulate the buyout price of the vehicle at the end of the lease.

Don’t blow your budget on a car.

Leasing or buying probably won’t be a make-or-break financial decision. There are merits to both decisions, which is why some people lease and some people buy. The much more important consideration is the affordability of the car that you’re driving. SUVs and trucks have proliferated in Canada and the United States in recent years. 70% of vehicles sold in the U.S. in 2019 were trucks and SUVs. Aside from the added environmental impact from worse fuel economy, trucks and SUVs are more expensive than sedans (this is likely why there is as much auto debt as student loan debt in Canada). Excessively long car loan terms are often used to hide the price; individuals finance the vehicle for 8 to 10 years to keep monthly payments down, but by the time they own the vehicle free and clear, most of its useful life is gone. For longer loan terms, the amount of interest will balloon. The below table is based on an interest rate of 2.99% and a new vehicle price of $40,000.

Car Loan Financing
Term (months)Monthly PaymentTotal Loan Interest

With homes, the prevailing advice used to be to buy as much home as you can afford; now, the pendulum has swung the other way, and many prospective homebuyers just want as little home as they will be comfortable in. It’s time for this logic to be adopted for vehicles, too.

When it comes time to get a new vehicle, consider the pros and cons of buying and leasing as they relate to your personal situation, but most importantly, make sure that the car you choose fits into your budget. A vehicle is a huge convenience but it is still discretionary. A budget should never be blown on discretionary items.

Opinions are those of the author and may not reflect those of BMO Private Investment Counsel Inc., and are not intended to provide investment, tax, accounting or legal advice. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the author nor BMO Private Investment Counsel Inc. shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance. BMO Private Investment Counsel Inc. is a wholly-owned subsidiary of Bank of Montreal.

Max Kirouac
About Max Kirouac

Max Kirouac, CFA®, is an Investment Counsellor at BMO Private Banking in Winnipeg, Manitoba. If you would like to discuss this article more with Max, connect with him on LinkedIn.

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