Anyone still wondering whether it’s cheaper to buy or lease a new car is missing the point – and playing right into the hands of carmakers and car dealers.
The same goes for those who believe those ads offering zero per cent interest on a loan to buy or lease a new vehicle.
Few people – except fools, relatives or very good buddies – lend money interest-free. When retailers offer interest-free credit, they usually inflate the purchase price. Or they offer free credit only for a short period, as credit card companies do.
Whether you buy or lease a new vehicle makes little difference to the dealer and no difference to the manufacturer. Either way, you pay for the vehicle. But with a lease, you pay for the vehicle only for as long as the lease period lasts, plus taxes, plus interest, if any. That interest is calculated on the vehicle’s value when new and declines slightly with each monthly payment, which is a blend of principal and interest.
I drive a 2012 Chevrolet Cruze with automatic transmission and air conditioning. I visited an Ottawa GM dealer recently to see how much I would pay for a 2015 model of the same car.
A salesperson assured me it would be cheaper to lease than to buy, but I doubt it. The answer depends on three variables.
First, how much would the vehicle cost to buy when new? Second, how much is the vehicle likely to be worth at the end of the lease? And third, what is the interest rate on the cost of borrowing the money to finance the vehicle? (Someone has to pay for the vehicle, and it’s not the manufacturer or the dealer. If there is no interest charge, the vehicle was probably overvalued by the dealer, meaning higher monthly lease payments.)
I asked the salesperson how much it would cost (a) to pay cash for the vehicle, (b) to purchase the vehicle with a zero per cent loan repayable over four years or (c) to lease the vehicle for four years.
The answer, including all fees and taxes, was: $22,060 if I paid cash; $23,560 if I took a zero per cent interest loan; and $11,665 for a four-year lease.
With a lease, I would have the option to return the car to the dealer after four years or to purchase the vehicle at that time for $9,895. That sum is the dealer’s estimate of what the vehicle would be worth after four years of wear and tear. If I decided to purchase the vehicle for $9,895, I would also have to pay 13 per cent sales tax on that sum, for a total of $11,181.
Now, do the math: it would cost me $11,665 in monthly payments to lease the car for four years. If I then bought the car, it would cost me another $11,181. That is a total of $22,846.
In all three scenarios, I would end up owning a four-year-old car. In descending order, it would cost me $23,560 with a zero per cent loan for four years; $22,846 if I leased the car for four years and then bought it; and $22,060 if I paid cash for the vehicle.
Of course, many people don’t have the cash to buy a new set of wheels. And those who can afford the cash might prefer to spend it on other things or leave it invested somewhere.
But even without negotiating a purchase price, I would – in the example given above – save about $800 by buying with cash rather than leasing.
As it was, I had done absolutely no negotiating with the car dealership. I had simply asked for three quotes. How much would the vehicle cost for cash? How much to buy on credit? How much to lease?
Ads for car leasing stress the low monthly, even weekly, payments. Ads for car sales stress the zero per cent interest loans. Thus, car dealers have an incentive to offer an attractive deal right away on a lease, since the monthly payment includes extras, such as fees that you only hear about later when you are purchasing a vehicle. Still, buying with cash seems to me to be the cheapest option.
Car dealers are notorious for not being upfront with their customers about pricing. They claim to have simplified their pricing by including some items previously excluded from advertised prices. But many dealers still add an item called an “administration fee” or something similar to their advertised purchase prices. This fee can be $1,000 or even more. It’s the same ruse that airlines used with their “fuel surcharge” and other extras until the Canadian government cracked the whip on them.
Recently, GM retailers have been advertising a cash discount of 20 per cent off manufacturers’ suggested retail prices on some in-stock vehicles.
That tells us something. For buyers who pay cash, it’s a discount of $5,000 on a vehicle with a “list price” (or manufacturer’s suggested retail price) of $25,000.
I have no confidence in websites that purport to help car buyers get a good price on a new vehicle. More often than not, these sites seem to be designed to discourage would-be car buyers from seeking a better price than a dealer is offering.
I also do not have much confidence in dealers that offer vehicles at “invoice price.” For one thing, that “invoice price” can be inflated with add-ons such as “administration fees.” And what is an “invoice price” anyway? It might be the nominal wholesale price (what the dealer pays the manufacturer). But then dealers get discounts from manufacturers, based on their retail sales volume.
I admit I’m not good at negotiating with car dealers. And every time I buy a new vehicle, I vow that I will do better next time. My advice, to myself and anyone interested, is: first and foremost, insist the car dealer tell you exactly how much the vehicle will cost – all taxes, fees and surcharges included. Then, once you have such a bottom-line quote, shop around and see if you can negotiate a better deal.
Michael Prentice is OBJ’s columnist on retail and consumer issues. He can be contacted at firstname.lastname@example.org.