When Is It Better to Rent a Car Than to Buy?
Since buying a car is one of the biggest purchases you can make, it is wise to consider all your options. Both leasing and buying have their own advantages and disadvantages, just like renting versus buying a home.
The most obvious difference is that with a lease you get a new car every few years and you don’t have to deal with the hassle of selling it later; just hand over the keys to the dealer and get a new lease.
On the other hand, when you buy a car, every payment you make for the funded car creates equity; once you pay off the loan, it’s free and clean for you, so you can sell (or donate) it for something later. (If you buy the car straight away without a loan, you will save even more money.)
What to consider when buying versus leasing
Since you were asking what makes the most financial sense in the first place, here’s how to figure it out and other considerations. As an example, let’s look at the cost between buying or renting a $ 20,000 car over five years, assuming the same rate of 6% on a new car loan (payable after 3 years) and leasing (two three-year leases), and driving 12,000 miles per year ( numbers provided by Edmunds).
Your monthly cash flow
Renting a car often has a lower monthly payment compared to financing a car on the same loan terms, because when you rent, you pay for the depreciation of the car over those years, rather than the full cost of the car. If you need access to more cash every month, leasing may be more beneficial.
In our example, the monthly payment for a car loan is $ 608 per month; rent is $ 350 per month for the first three-year lease, then $ 385 per month for the last two years (as the second lease begins).
Affordable savings on down payment and down payments
Most leases have low upfront payments – or you can ask the dealer for a down payment – and you also pay less sales tax when renting (tax is calculated in most states only on monthly payments, not the total price of the car). As with the lower down payment, leasing has less of an impact on your budget and cash balance.
Example: Down payment on a loan of $ 3,000 versus $ 2,000 on a lease.
How much do you drive
If you drive a lot – 10,000 to 15,000 miles, depending on the rental agreement – you may have to pay extra for every mile. Smart Money claims that many leasing companies charge 12 to 15 cents per mile for extra miles, but you can pay less (10 cents per mile) if you buy them in advance at the lease agreement. Kiplinger notes that while the extra mileage penalty sounds intimidating, if you plan to trade in a purchased car, you will also be penalized for above average mileage.
There are no mileage surcharges in this example, but if you drove 5,000 miles on top of the 20 cents per mile deal, it would cost you $ 750.
How much are you in the car
If you tend to scratch your vehicle or have a high risk of damage from children or other hazards, renting may not be for you due to wear and tear charges. Depreciation fees vary and will depend on your agreement, but AAA is usually capped at the total three months rent.
Our example also does not include depreciation costs, but if you were unable to keep the vehicle intact, the three months payout in this example would be $ 1,155.
If you drive on business
When renting, a portion of the car’s depreciation and finance costs may be deducted from your taxes. However, no interest is deducted on car loans. The IRS has guidance on how to calculate the tax deduction for a rented car (there are many calculations based on your business car utilization percentage, the value of the car, and additional car-related costs such as gasoline and maintenance).
How long do you plan to store the car
Of course, this is a serious consideration, since if you really only want to drive a few years, leasing is the most convenient option. However, you will pay a lot if you try to exit the lease before the expiration date – up to six additional months of payments, according to Smart Money. You need to be sure that you can stick to the terms of the lease.
The reality is that buying a car is almost always cheaper in the long run, according to most calculations, such as this one on Cars.com . The longer you own a car, the more you save on your purchase.
In our example, after five years, renting a car was worth $ 6,502 more than buying (assuming the car was worth $ 7,000 at the end) —or $ 1,350 more per year.
Run the numbers
There are other considerations as well, including your lifestyle (do you want to always have the latest car technology?) And the desire to avoid large old car repair bills, which can make leasing more profitable. If you want to avoid confusion in terms and agreements, a purchase might be better. If you need a quick calculation that makes the most financial sense, use the lease calculator:
- The Dinkytown Buy or Rent Calculator includes factors such as annual depreciation, loan and lease fees, and interest you can earn on the money you save on leasing in advance.
- An automatic interest rate calculator is another useful tool. A master who asks you, for example, how well you service your cars and what your credit rating is.
In the end, your decision will depend on your budget and your driving needs, but we almost always recommend buying instead of leasing.
This story was originally published in November 2011 and was updated on December 18, 2020 to update the post in line with the current Lifehacker style.