New Car Leasing vs New Car Financing: The Math

This is one of the most controversial topics when it comes to a new car acquisition. Here at LeaseCosts, we promote car leasing over financing for one simple reason: it is better in all categories except when you have to drive a lot. I wrote a specific article about that, but today I want to emphasize on the benefits related to the actual fixed transportation costs: monthly car price.

The "7 Years Term" Case

It is evident that the longer you take the term, the lower the monthly payment will be, but it doesn't mean you pay less. You end up paying, at least, the vehicle price on the ideal scenario of a 0% interest rate. But this is usually not the default scenario. The longer the term, also the longer the interest rate will be as there will always be inflation, but that is a topic for a separate article.

As a note apart, most of the times you see a 0% interest rate ad, it is because it comes to demo vehicles or last year models that are not as attractive today as there are new editions available. Somehow, dealers need these vehicles to drive out the parking lots, so it isn't a bad idea to make it a more win-win situation for both the seller and the buyer.

So let's get back to the 7-year term. Why seven years and not 5 or 6? 7 years (or 84 months) is the time where on average the monthly leasing cost equals the monthly financing cost. I mean in average, as, you will notice in the following set of samples, that the specific case of the Tucson, is with six years. All four examples are from the featured models this month (prices are without taxes to simplify the math, all estimated in February 2018 & the lease yearly Km allowance is 20,000km/year):

2018 Nissan Rogue S CVT FWD (base model)

  • Base MSRP: $26,148.00
  • 36 Months Lease: 333CAD/month (NO DOWNPAYMENT) - 1,99% Interest Rate - Residual Value: 16,486.00
  • 84 Months Finance: 335CAD/month (with 2,700 DOWNPAYMENT) - 2,99% Interest Rate

2018 Hyundai Tucson 2.0L Automatic AWD (2nd trim)

  • Base MSRP: $26,999.00
  • 36 Months Lease: 444CAD/month (NO DOWNPAYMENT) - 2,99% Interest Rate - Residual Value: Not Estimated
  • 72 Months Finance: 425CAD/month (NO DOWNPAYMENT) - 3,49% Interest Rate

2018 Volkswagen Atlas Comfortline 2.0L Automatic FWD (3rd trim)

  • Base MSRP: $39,690.00
  • 36 Months Lease: 581CAD/month (NO DOWNPAYMENT) - 1,99% Interest Rate - Residual Value: 22,226.00CAD
  • 84 Months Finance: 571CAD/month (NO DOWNPAYMENT) - 3,99% Interest Rate

2018 Audi Q5 2.0 TFSI Quattro Komfort (base model)

  • Base MSRP: $44,950.00
  • 36 Months Lease: 765CAD/month (NO DOWNPAYMENT) - 3,90% Interest Rate - Residual Value: 27,419.00CAD
  • 84 Months Finance: 761CAD/month (NO DOWNPAYMENT) - 4,90% Interest Rate

For Seven Years you Lease 3 cars or Finance 1

That is, by far, the main difference between leasing and financing when we get into the "same" monthly payment or monthly fixed cost.:

Vehicle Change

  • Leasing: 3 vehicles (3 years the 2018 model, three other years the 2021 and the last year you start leasing the 2024 model)
  • Finance: 1 vehicle (7 years paying the same car)

Warranty Coverage

  • Leasing: The manufacturer will cover you for the full 7-year term on mechanical problems. Most manufacturers offer three years by default, so you won't have to fix any mechanical problem of the car you are renting.
  • Finance: The vehicle will only be covered for the first 3 (less than half the term). Chances are you'll have to do something in the next 4 years, depending on a huge amount of variable factors like your driving habits, the model, the parts...

Interest Rate

  • Leasing: Short-term interest rates are usually lower as these are shorter (3 years).
  • Finance: Finance terms are naturally longer and, while the payment is similar, any additional accessories or extras included on the deal will considerably increase the amount of interest paid.

Variable Costs

  • Leasing: Insurance, fuel, and maintenance costs are the same for both cases. Just regular maintenance.
  • Finance: Regular maintenance too, plus the fact that, after 75,000Km and also at 150,000Km, you should do brake pads and discs replacement. After 100,000 Km, the fluid check should be a little bit more exhaustive, and most mechanical problems start to occur. Don't forget you will still be around 2 more years paying the loan as if it would be the first month of the contract.

Tire Replacement

  • Leasing: Leased vehicles already come with tires, so you won't have to replace summer tires. Every 3 years, you will get a whole new set of the new vehicle. 
  • Finance: It will be hard that the original set of tires last 7 years, so expect to buy a new set after the 4th or 5th year.

End of the Term

  • Leasing: You will have to continue paying the same monthly payment for 2 more years, but you will be driving a leased vehicle with full warranty coverage.
  • Finance: At the end of the 7 years, you would have a seven years old "already paid", 140,000km used car. This is the most controversial part of the comparison. So here we go now with the assumptions:

I will go with an average and popular vehicle, so let's take a 26,148.00CAD MSRP 2018 Nissan Rogue S CVT FWD as an example. Also, note the following: the more expensive a vehicle is, in general, the more costly parts, service and maintenance is. It is always way more expensive to fix the A/C unit of a Mercedes than it is for a Nissan.

So, based on the 2018 Rogue:

A 7 years old Nissan (now from 2011) costs around 5,900 based on Kijiji listings by vehicle owners. Used & pre-owned vehicles sold by dealerships had a capital investment that makes the status of these to be better than the one sold by a simple user, on average. Also, please note that not all vehicles retain the same level of value over time, I'm just using this case as an example you can extrapolate to the one you are interested in and do your own math.

So, assuming that in 7 years, I will be able to sell my 140,000 km used 2018 Nissan Rogue for 6,000CAD (or use it as a trade-in on a new deal), financing would have been better for me only if:

  • Take into account that I had to do a 2,700CAD downpayment.
  • Nothing mechanical would have happened to you in the last 4 years without warranty. 
  • All required and additional maintenances were done accordingly.
  • No scratches, noise or visible damage would affect the negotiation to sell the vehicle.

As the previous scenario is pretty ideal and risk is a key variable, then it would have been definitely way better, optimal and safest, always to have chosen a lease.

Just don't wait 7 years to know it. You learned it today ;)

About the author

Jorge Diaz is a passionate car lover, winter driver & Software Engineer. For the last 10 years, he has built Online Solutions used by more than 5,000 companies across the globe. He founded LeaseCosts in 2016 with the purpose of simplifying and helping people to better understand the complex market of new vehicles in Québec and Canada. You can connect with Jorge in LinkedIn or send him a direct message.