Renting a car is cheaper than buying one

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 07 January 2012  |  Comments 26 comments

When you add up all the costs, it can be miles cheaper to lease a car!

Renting a car is cheaper than buying one

John Paul Getty, the oil tycoon said to be the richest man in history, once remarked:

“If it appreciates, buy it. If it depreciates, lease it.”

In other words, the billionaire strongly recommended buying assets that increase in value (such as shares and property), while renting assets whose worth tends to fall over time.

Getting behind the wheel

Taking Getty's advice, I've never bought a new car (although I once used my bargaining skills to buy my wife a new car at a big discount to the list price). This is because the biggest cost of owning a car is depreciation: the financial loss due to a vehicle's value falling as it ages.

Although depreciation varies greatly across makes and models, a typical car will lose approximately two-fifths (40%) of its value in the first year. After three years, the average vehicle will have lost around three-fifths (60%) of its list price.

For this reason, my family tends to buy nearly new cars, allowing the previous owner to take the biggest to hit to depreciation in the first year or two.

Renting your road

However, there is another easy way to avoid depreciation and manage the risk of big repair bills. This route involves renting or hiring a car for two or three years through what's known as personal leasing.

In effect, a lease is a long-term rental deal, through which you drive a car for an agreed period at a fixed monthly cost. Leasing cars is very popular in the USA, where drivers worry more about being seen in the latest model than they do about owning the metal! Nevertheless, British motorists are becoming keener on this 'renting route to the road'.

How leasing works

With a leasing contract, you do not end up owning the vehicle at the end of the contract.

Instead, you pay a fixed monthly amount during the contract's term, which can include servicing, repairs and MoT costs. However, when the contract ends, you must return the car in good condition. Thus, when your lease runs out, you'll need sign a new lease in order to get into your next vehicle.

If you cover a lot of miles, then leasing can work out cheaper than buying a car. However, if you exceed a certain mileage (say, 10,000 miles a year), then the owner -- the leasing company -- will charge you a per-mile penalty for exceeding this limit. In addition, you must pay for any damage you cause to the car, which must be returned in good condition.

Before you can drive away, leasing companies demand an upfront deposit, usually three monthly payments. This initial deposit is not refundable.

In short, with leasing, you dodge depreciation and hand over the 'resale value' risk to the leasing company. What's more, it's up to the leasing company to sell the car to its next owner, taking away further hassle.

Renting versus leasing

The monthly repayments to lease a car are usually much lower than those needed to buy it. In some cases, they can be less than half the repayments for a loan. However, over two or three years, the total cost can be higher, because you don't have a car to sell on when your contract expires.

What's more, it's normally cheaper to buy cars which hold their value well and have strong resale values. On the other hand, it's usually better to lease vehicles which depreciate rapidly.

By the way, it's important to watch out for VAT (Value Added Tax), which adds 20% to the monthly rentals paid by private motorists. Also, you'll need to add on the cost of car insurance.

In its last survey, consumer magazine Which? reviewed 12 cars to find out which are cheaper to buy than to lease. Here's the magazine's advice:

Make and model

Buy or lease?

Audi A4 Avant 2.0 TDI 143 SE

Buy

Audi TT 2.0 TDI Quattro

Buy

Citroen C4 Grand Picasso 1.6 HDi SX

Buy

Honda Jazz 1.2 i-VTEC S

Buy

Jaguar XF 3.0D V6

Buy

Mazda 2 1.3 TS2 5-dr

Buy

Renault Modus 1.5 dCi 86 Dynamique

Buy

VW Golf 2.0 TDI 110 SE 5-dr

Buy

VW Scirocco 2.0 TSI GT (DSG)

Buy

Honda CR-V 2.2 i-CTDi SE

Either

Nissan Qashqai 1.5 dCi Acenta 2WD

Either

Ford Mondeo 2.0 TDCi Zetec

Lease

Notes

  1. 1.    Based on three years and 36,000 miles.
  2. 2.    Loan interest charged at 8.9% APR.
  3. 3.    Costs exclude fuel, servicing, Vehicle Excise Duty ('road tax') and car insurance.

As you can see, Which? recommends buying nine of these 12 cars, as most are family or upmarket cars which hold their values well. Of the remaining three, only the Ford Mondeo is best leased, but it's a close call for the Honda CR-V and Nissan Qashqai.

In general, mass-market models which are popular with company fleets usually work out much cheaper to lease than buy. Conversely, vehicles which hold their value well (including upmarket German cars from the likes of Audi, BMW and Mercedes-Benz) usually work out cheaper to buy.

In summary

If you don't have a big deposit to put down to buy a car, or you want to bring down your monthly repayments by between a third (33%) and half (50%), then personal leasing may be just up your street.

Likewise, leasing allows you to get behind the wheel of a nicer car, without worrying about the risks of ownership, particularly depreciation. In effect, leasing can mean fixed-price motoring -- driving a new car every two to three years with complete peace of mind!

More: Get quality quotes for car insurance | Four reasons why fuel prices will rise | Brits work longer hours than Europeans

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Comments (26)

  • neil733
    Love rating 1
    neil733 said

    Buying nearly-new is not risk-free.

    Why is a nearly-new car for sale? Is it because it was a short-term rental vehicle previously, driven mostly by people who didn't care about whether or not they abused it?

    Was it a troublesome vehicle the first owner has taken a loss on to buy something more reliable? If you can't rule either of these two out, then you could be buying a troublesome vehicle. It may have most of its warranty left, but if its always in the garage for warranty work it is of little use to you.

    I have in the past bought brand new (built to order) two cars that according to friends and colleagues who bought similar cars nearly new were likely to be troublesome, but both proved almost faultless for the first five years (perfectly faultless in the case of the 1997 Rover 200). Why? My cars had been built and shipped straight to the dealer and delivered to me - they hadn't been sitting around for weeks or months deteriorating from lack of use waiting for a buyer, or been abused by rental-car drivers. Yes, I did suffer the depreciation, but it was worth it for the lack of problems.

    Report on 12 January 2012  |  Love thisLove  0 loves
  • jaymie
    Love rating 18
    jaymie said

    Renting a car is cheaper - except for 75% of the table I've quoted from Which?. Odd.

    Anyway, I like the idea of leasing, but in an uncertain economic environment it makes far more sense to hang onto the car I've got. Should the worst (in employment terms) happen, I can sell that for a couple of thousand pounds and not have to worry about meeting my leasing commitments for the remainder of the term for a car which wouldn't be essential. Who wants that over their head right now?

    Report on 12 January 2012  |  Love thisLove  2 loves

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