Buying versus Leasing a Vehicle

The day I purchased my first new car begat data collection which continues today. Fifteen years of data, you may agree, should be enough to draw some conclusions on this topic.

Some years ago my Uncle Ron was always driving newer vehicles. He leased them, arguing that leasing was the way to go, because you never had to fix them, and they never let you down. He may have suggested it was cheaper to lease than to buy, in the long term, because owning your vehicle means you also own the associated problems as it ages. That is what I got out of it, at any rate.

I wasn’t even of driving age when I was listening to these ideas, so I may not have all the finer points remembered faithfully. Regardless, when I bought my first new car I set a goal of proving for my own satisfaction which is better: Lease a new vehicle every few years, or buy new and drive it until it dies.

Death means failure due to an inability or unreasonable cost to maintain a vehicle such that it is safe to drive and can be relied upon to start and faithfully carry you daily to your destination on normal roads, in all seasons. I concede that a vehcile’s end of life could also be the age at which, no matter how well it has been maintained or how low the number on the odometer, one could not expect to get any more than scrap value for selling it. A person might reasonably deny maintenance expenditure on a vehicle worth next to nothing.

Reasonable upkeep cost I shall define as fewer than $2000 annually. You could trade that sum for a used vehicle at auction that could reasonably be expected to last at least a year of daily driving. It is approximately 77-percent greater than my actual cost of maintenance to date, but I could call it affordable if I was being sentimental, or otherwise stubborn about keeping my car.

Feel free to define your own limits within your own comfort zone, but understand that such changes may mean you cannot take my data and purport to have the right answers for your own situation.

Giving credit where it is due, my pal Martin is directly responsible for my writing this page. Right about now he would be asking for my point. Pass the gravy; Here come the meat and potatoes.

I Say Buy It

Why rent when you can own? You might argue with me on this and claim it is better to lease because your vehicle is used for your business, and you can write more off your income tax1. You’re wrong, I’ll then say, because you would be. Writing more off your income tax does not equate to having more money left in your pocket, if in fact you paid more out just to be able to write more off.

Still not convinced? I record every quarter I plug into a meter for the privlege of parking my car. Those numbers have their own category in my spreadhseet (aptly called parking). I have a lot of data that favour my version of reality. May we move on?

Table 1 — 15 Year Cost of Driving a New Beetle Purchased New
Year Distance travelled (km) Fuel Cost Cost of Maintenance Other Driving Costs Fuel Cost Average
2000 22 791 1672.76 23.81 1577.78 1275.21
2001 20 221 1281.28 210.57 1764.56
2002 16 399 1066.81 2004.26 1628.35 Annual Maintenance Average
2003 14 366 1107.53 334.12 1701.57 1128.60
2004 10 463 871.07 555.11 1476.88
2005 9716 892.89 218.65 1621.15 Annual Distance Average (km)
2006 11 549 1054.63 2525.48 1307.18 14 328
2007 10 715 1122.24 1092.95 1454.69
2008 15 415 1469.74 4.62 2186.65 Vehicle Financing Cost
2009 17 999 1434.70 2295.78 1820.75 40 462.80
2010 11 954 1116.10 1249.63 1511.05
2011 14 818 1564.68 804.76 886.00 Total Cost of Ownership
2012 11 298 1281.39 239.50 827.00 99 311.22
2013 14 040 1639.85 2945.59 1584.05 ($18.28 per day)
2014 13 172 1672.76 2424.11 1147.51
Chart 1 - Annual Driving Costs of 2000 VW New Neetle

The numbers in Table 1 do not exactly add up because not all my data are presented there, but the total cost of ownership is accurate to 15 Dec 2014. Nearly $100 000. Ouch.

Total driving costs for each of the first 15 years are shown in Chart 1. Two accidents (in 2002 and 2014) and the repair costs associated with them are included. In 2002 it was cheaper for me to do the repairs than to pay the increase in my policy over 5 years. I learned a tremendous amount about my car in the process.

In 2014, I had no collision coverage, leading to more backyard mechanic adventures. I am now certain that the best policy is simply not to get into accidents.

What About Leasing?

Leasing involves restrictions on your freedom, as defined by the contract you sign. Should you stray, you would pay. Extra, that is. So why pay more? I have better things to do than give my money to a dealership for nothing in return.

Had I leased instead of purchased, maintenance costs would have been much lower. All I would have had to do was buy a set of tires before I turned in each leased vehicle, conservatively priced at $6002. I would have had to pay overage for a few of those years, too. I understand that cost varies, but since I see some USA estimates of between $0.10 and $0.30 per mile, I don’t think it a stretch to say that $0.05 per kilometer is a conservative number.

I went on vw.ca and built a car that cost as near as makes no difference the same as what I paid for my car when I drove it off the lot at the turn of this millenium. (Okay, it was actually pricier to the tune of $40.55, but that was close as I could get it.) $6637.80 per year is what I got for a 3-year lease cost. Assuming all costs of driving other than maintenance would have been the same might be a stretch, but it’s the best option available for this approximation.

If you’re keeping track, here is what we are working with in a nutshell:

Table 2 shows the leasing costs as best I could project them to be.

Table 2 — 15 Year Cost of Driving a Leased VW New Beetle
Year Distance travelled (km) Fuel Cost Cost of Maintenance Other Driving Costs Fuel Cost Average
2000 22 791 1672.76 200.00 1917.33 1275.21
2001 20 221 1281.28 200.00 1975.61
2002 16 399 1066.81 200.00 1648.30 Annual Maintenance Average
2003 14 366 1107.53 200.00 1701.57 200.00
2004 10 463 871.07 200.00 1476.88
2005 9716 892.89 200.00 1621.15 Annual Distance Average (km)
2006 11 549 1054.63 200.00 1307.18 14 328
2007 10 715 1122.24 200.00 1454.69
2008 15 415 1469.74 200.00 2186.65 Vehicle Leasing Cost
2009 17 999 1434.70 200.00 1920.70 99 567.00
2010 11 954 1116.10 200.00 1911.05
2011 14 818 1564.68 200.00 1286.00 Total Cost of Leasing
2012 11 298 1281.39 200.00 1227.00 127 732.67
2013 14 040 1639.85 200.00 1984.05 (23.51 per day)
2014 13 172 1672.76 200.00 1547.51

So is leasing all it is cracked up to be? That is for you to decide for your situation, but I cannot stomach the cost difference between the two, just to be always driving a new car. Feast your eyes on chart 2 to see what I mean.

Chart 2 - Costs of Owning vs. Leasing Over 15 Years

I could have bought myself a brand new one and paid cash for it if I had paid myself the difference between owning and leasing over all those years! Oh well, a missed opportunity, maybe.

What is that, you say? Leasing on 4-year terms costs less? Oh yes, it does indeed! Because you would likely need to replace tires and brakes before turning in your leased vehicle after 4 years, I have doubled the cost of maintenance for the calculation. Due to the 4-year lease term, the lease cost drops by about $11 500. It all looks pretty good, but still not come close to the relative bargain that is ownership. Check chart 3 for a one-stop summary many varying options.

Chart 3 - Cost of Various Owning and Leasing Options Over 15 Years

You can immediately see that a 4-year lease term is a money-saver versus a 3-year term, and also that owning is always less expensive. I assumed that all off-lease purchases would be for 3-year-old vehicles. The price used was $24 000, and the expected resale price was taken from that.

Without getting too granular about the numbers from there, it should suffice to say that everything resembles my own recorded costs as closely as possible. That is why, for example, the fuel cost is the same across the board. All other numbers were pulled right from my recorded values, and where necessary, averaged out to an annual cost and multiplied by 15 years to get a normalized data set. Declining resale values are reflected in the data for the older vehicles, as well. It is not perfect, but the general trend is clear.

What I Will Do Differently

Carrying forward what I have learned over the past 15 years as a car owner, and extrapolating a bit from the data I presented here, I will do things a little differently going forward.

For one, I will never buy a new car again. Well, winning the lotto jackpot would likely change my mind on this point, but since that is such a slim chance, I will be driving old vehicles forever.

The sweet spot seems to be to buy a 3- or 4-year-old vehicle and drive it for 10 years. Sell it, buy another, drive for ten more years, repeat as necessary. This depends upon the vehicle of course, but try to stay focused, okay?

The disadvantages of this are right up front: Usually a car of a few years, especially one off lease is in need of maintenance. New tires if nothing else, but probably a brake job, and all the engine fluids and filters should be changed so you at least know that last time that work was done. Maybe something a little more expensive, like a timing belt or cylinder head, depending upon the vehicle and how far it was driven. This can scare people quickly in the lease direction, but fear not!

The good thing about buying a slightly used vehicle is that the price is right. Technically if you bought a 3 year old vehicle and had to pay $4000 in maintenance the first year you owned it, you would still be ahead and you get to skip the side effects of that toxic new car smell!

Example: My car cost about $33 000 with taxes (cash price) to purchase. At the 13-year-old mark, purchase cost plus maintenance was $44 560. If I had purchased the same car 3 years later it would have cost me only $23 200, plus required maintenance. About a year after purchase, the car would have needed a timing belt and water pump ($1200 at the dealer), tires ($600), and brakes ($300). I need rust protection for the climate I live in, so add $140 annually for that.

That is about $25 500 for a 4-year-old vehicle that I have driven for a year already, and should get another 9 years from. Assuming my worst case maintenance cost limit of $2000 annually (average) I would end up paying $43 500 for the same car at the 13-year mark, when it would be time to sell it and start over again. That is still $1000 cheaper than what I paid for my car buying brand new. If I were to be so bold as to use my recorded maintenance costs in this example, the total cost would be only $34 820.58, which is nearly $10 000 cheaper than buying and driving the same car new to the same 13-year-old stage.

I was surprised after extrapolating the numbers that reselling the car at the 10-year-old mark and buying another ended up costing more than driving for an extra 3 years and selling at 13 years of age. There is not much difference in terms of resale between those two ages, and the cycle of major maintenance expenditures is primarily to blame. The take-away lesson then, is to figure out the numbers for your particular vehicle so you can find the right time to sell.

Oh, and what about the fact that with a leased vehicle you never have to have it sit in a shop for repairs? What about the time and money involved there? Simple, for what you saved by buying over leasing, have your closest exotic car rental agency on speed dial, and rent yourself something swanky for a few days! With the money you saved by buying your vehicle, you can afford it each and every time, and still have lots let over to see Victoria Falls, or climb Machu Picchu, perhaps both!

Keep your wheels pointing down, and enjoy your new found wealth.

Footnotes

1. Where I live, you are able to write off the business-use portion of your vehicle expenses against your income tax. Whether leased or purchased, you are able to write off the cost of obtaining the vehicle. When purchasing, you write off the loan interest cost, if any, as well as the depreciation. The amount is never allowed to be the full purchase price of the vehicle all at once. While leasing, you can write off the entire cost of the lease. The cost of a lease includes interest and the depreciation, so it is still a multi-year write-off. The difference is you own no capital property with the lease, so there are no rules about disposition of it at the end of the lease, and fair market value has no place in the equation. Assuming you would drive your purchase until it was mostly worthless, disposition means very little as far as tax implications. You would get full value of all write-offs, the same as a lease, by the end of a vehicle’s useful life. Oh, and did I mention you pay less to buy in the first place? Saving money is good. Honest! <back>

2. The stock tires on most VW New Beetles were soft, grippy, quiet running bits of rubber that performed very well in most conditions. They were also worn beyond acceptable limits after 30 months. No matter what, I would be paying for them at lease return time. I spent $1000 on the best winter tires I could find, (and yes that cost is included in the total cost of ownership presented in the table.) In other words, don’t get your knickers in a twist over my $600 figure! <back>

3. The lease terms I got from vw.ca included 16 000km annually in the price. I know that leasees often concern themselves with keeping within their travel budget for the year so they do not pay extra. I would have been no different in that regard, but there is no way to know for certain if, or by how much I may have exceeded that budget in any given year. Averaging out to fewer than $45 annually, it is a nearly negligible cost. I include it only to keep the numbers identical in as many respects as possible. <back>

4. Collision coverage costs vary; $400 is what it was for me. Since buying or selling a 10 year old vehicle is done at a fraction of the original cost, it made sense to me to save the extra $400 per year and decline collision coverage after that age. Leased vehicles are always young, so I would not turn down collision coverage at any point. This leads to a total increase of $1600 for the leasing data set. <back>