When I purchase a vehicle I keep it forever. Leasing would be twice as expensive.
We would agree that it is more expensive to lease than it is to purchase a vehicle and keep it for a long time. However, you may be surprised at how small the difference in costs actually is. And when we take the Net Present Value, you may be shocked at how small the difference is. For this example we are going to compare purchasing a 2006 Honda Accord and leasing a Honda Accord for 4 years and then replacing it with new Honda Accords every 4 years.
We have chosen the Honda Accord as a typical vehicle that a family might keep for 10 years. It is a best seller, is moderately priced, has a good resale value, and is known for its reliability and low maintenance costs.
All of the numbers in this example can be found in the table below.
The following assumptions were made for this analysis:
- A new 2006 Honda Accord is purchased for MSRP of $21,700. At the end of 10 years it is sold for 15% of its original MSRP ($3,255), and then this number is adjusted for 3% annual inflation. This number is similar to what 10 year-old Honda Accords are selling for today.
- A new Honda Accord is leased every four years. A cap cost equal to MSRP is assumed each time. When the lease is renewed, we assume that lease payments increase 10%, which translates to an annual inflation rate of 2.25%. Vehicle prices have been very soft recently, and with worldwide overcapacity, it is hard to imagine large increases in vehicle prices anytime in the foreseeable future.
- For the vehicle purchase, it is assumed that it is financed over 4 years at 6.5% interest.
- A general inflation rate of 3% is assumed over the 10-year evaluation period.
- Insurance starts at $1,000 for each vehicle. The insurance on the purchase stays at $1,000 for the entire evaluation period as inflation balances out decreases in the value of the vehicle. For the leased vehicle, the insurance is the same for the four years but increases by 10% at the beginning of each lease term to account for the increased value of each vehicle purchased.
- Property tax starts out at $500 for each vehicle and then decreases 10% per year as the vehicle value decreases. For the leased vehicle, the property tax is increased with each new lease to reflect inflation and then decreases 10% again each year.
- Maintenance and repairs are $30 per month per vehicle and then increase 3% per year. This number includes washes and details. For the purchased vehicle, maintenance and repairs increase to $75 per month in years five and six, $100 per month in years seven and eight, and to $100 per month in years nine and ten. All figures are adjusted by 3% per year for inflation.
- Gasoline is calculated on an average of 25 miles per gallon and 15,000 miles driven each year. For the leased vehicles, gas mileage increases 20% each time the lease is renewed. Gasoline is $3.00 per gallon the first year and increases 3% per year.
The table below shows the total costs of ownership under the purchase and lease scenarios. It costs an estimated total of $65,769 to purchase a 2006 Honda Accord and keep it for 10 years. Discounted at 8%, this comes to a Net Present Value of Ownership of $47,882. It costs a total of $80,969 to lease a 2006 Honda Accord and to replace it with a new Honda Accord every four years. Discounted at 8%, this comes to Net Present Value of $53,826. So the difference between leasing a new vehicle every four years and purchasing and keeping it for 10 years is $127 per month or $50 per month in Net Present Value terms.
Our guess is that this difference is significantly smaller than you would have guessed. Our analysis also doesn’t take into account any of the new standard features or safety measures that will be built into new vehicles, or the value of your time when dealing with the inevitable repairs that you will experience with the older vehicle. This is obviously a lifestyle issue that you may now look at a little differently.