Lease or Buy: How Does Rapidly Evolving Car Technology Change the Equation?

August 25, 2009

By Terry Smiljanich:

Anyone who has considered getting a new car has faced the question: is it better to buy the new car or to lease it? With all of the talk lately about hybrid cars and all-electric cars, and with all of the new computerized gadgetry showing up in new cars, the issue of buying versus leasing may have taken on a new wrinkle.

When you buy a car, you are purchasing a depreciating asset. As the years go by, your car has less and less value, but it retains some intrinsic value nonetheless and can serve as a trade-in when you finally give up on it.

When you lease a car, you are in effect “renting” the use of a vehicle that you do not own. When the lease runs out, you own nothing but can usually buy the leased car for a set sum based on its projected value.

Advantages and Disadvantages of Buying

If you choose to buy your new car, the advantages are:

  • pride of ownership – it’s all yours to customize or accessorize as you please;
  • you have no mileage limits – take it on your next vacation if you want; and
  • you own an asset that you can sell or trade in whenever you want.

The disadvantages of buying your car are:

  • When the warranty runs out, you’re faced with ever increasing repair bills;
  • you immediately owe all of the sales tax on the vehicle;
  • you cannot personally deduct the monthly installment cost of purchase off your income taxes;
  • your car loses value and appearance as the years go by;
  • if your car is in a serious accident, you permanently lose some value even after repairs; and
  • monthly payments on a car loan are usually higher than lease payments.

Advantages and Disadvantages of Leasing

If you lease your new car, there are several upsides to your decision:

  • Your monthly payments are usually lower, freeing up your account;
  • you are always driving a newer car with all the latest safety and technological features;
  • if you are in a serious accident, the reduced value of the vehicle does not affect you;
  • you pay the sales tax on the vehicle over time as opposed to right away;
  • if the car is used for business, you can take some tax savings on the lease payments;
  • you can still purchase the vehicle at the end of the lease term (with the typical open-end lease); and
  • it’s easier and more convenient to lease.

The downsides to leasing are:

  • you don’t own the car – you own no asset;
  • you must maintain the car and keep it in normal working order (no problem if it’s under warranty);
  • you face mileage restrictions and cannot customize the car; and
  • the longer you lease cars, the more you lose.

There are websites that will help you calculate whether buying or leasing is a better financial decision for your personal circumstances (Lease Guide, Car Lease Calculator, and Buy or Lease Calculator).

Changing Automotive Technology

As everyone knows, however, car technology seems to be evolving at an ever increasing pace. Practically every manufacturer has, or is coming out with, a hybrid gas/electric car that gets better mileage. Just a few months ago, $4/gallon gasoline convinced some people that oil won’t be around forever and that every time the Middle East hiccups, the West catches a cold. Consumer demand for hybrid cars has not been high, but as the technology gets better demand will certainly go up. Manufacturers seem to be banking on it.

In addition, all-electric cars are getting better. Currently, they are still too expensive and underpowered and not much liked by consumers, but does anyone doubt that the battery technology will vastly improve? When gas is expensive again, and an electric car is getting hundreds of miles on an overnight charge, consumer demand will inevitably go up.

Also, if you’ve looked at new cars recently you’ve no doubt been impressed with the latest automotive technological and safety innovations. Navigation aids, side and backup cameras, increasing audio options, and other bells-and-whistles give new cars the feeling of space capsules, much to the enjoyment of many buyers trading in their old cars.

Which brings us to a new observation. The difference between a 1995 and a 2000 car were not that great. The body styles changed, but the cars were still very similar. Between 2000 and 2005, the pace of change increased, but cars still retained much of their basic mileage characteristics and functions.

Can the same be said about 2010 cars and 2015 cars? If batteries get more efficient and cheap, if computer miniaturization continues apace, and if the price of gasoline continues to creep upward, what looks good for you today may change drastically by then. Today’s gas guzzlers might look and sell like white elephants in the near future.

What to Do

One of the most decisive factors in the decision to buy versus lease is whether you will want a new car in four or five years or will want to keep your current car for several years after that. The rapidly evolving automotive landscape may be something you want to consider in making your decision. Buy and lease options have financial differences and also depend on your attitude toward cars in general, but you may also want to try and look ahead and consider whether 2015 cars might be very, very different than today’s models. Of course, you will need to polish up your crystal ball, but deciding to buy or lease has always required some of that.