Is Leasing A Better Option? How Car Depreciation Affects Your Bottom Line

When it comes to car ownership, depreciation is an inevitable and often overlooked expense. A brand-new car can lose up to 20% of its value in the first year alone and continue to depreciate significantly year after year.

For many car buyers, this steep drop in value makes ownership less appealing, especially when factoring in how much money is tied up in a car that won’t be worth as much over time. But there is a solution that allows you to avoid the financial impact of depreciation: leasing.

In this post, we’ll explore how car depreciation impacts your finances, compare the costs of owning vs. leasing, and help you determine whether leasing might be the better option for you.

Understanding Depreciation: The Hidden Cost Of Owning A Car

When you drive a car off the lot, its value begins to plummet almost immediately. In fact, new cars typically lose 20-30% of their value in the first year, and they continue to lose value each year thereafter. After five years, a car could be worth as little as 40-50% of its original price, depending on the make, model, and condition.

This depreciation is one of the biggest hidden costs of car ownership. While you may not see it immediately, when you go to sell or trade in your vehicle years down the line, the value you get back will likely fall short of what you initially paid. This means that you’ll effectively be losing money on the car every time you drive it.

For example, if you buy a new car for £30,000, you could be looking at losing £9,000-£12,000 in value over the first 3 years. When you combine this with other ownership costs, like insurance, maintenance, and fuel, the true cost of owning a car becomes clear.

How Leasing Works: Avoiding The Depreciation Trap

Leasing is a popular alternative to car ownership, allowing drivers to essentially rent a car for a set period (usually 2-4 years) without the financial burden of depreciation. When you lease a car, you don’t own it; instead, you’re paying for the use of the vehicle for a specific time. Your monthly payments are based on the difference between the car’s current value and its expected value at the end of the lease term, which is known as the residual value.

Because you’re not paying for the full purchase price of the car, leasing typically results in lower monthly payments compared to buying. Additionally, since you’re only responsible for the vehicle’s depreciation during the lease term, you don’t have to worry about the steep drop in value that comes with ownership.

Leasing Vs. Owning: A Cost Comparison

To better understand the financial differences between leasing and owning, let’s look at a typical scenario for a mid-range car, such as a Volkswagen Golf, which has an MSRP of around £25,000.

Ownership Costs

If you buy the car outright or finance it with a loan, you will likely face:

• Initial Cost: £25,000 (the purchase price)
• Depreciation: £7,000 after 3 years (assuming 20-30% depreciation)
• Monthly Payments: £350-£400 (if financed over 5 years at 4% interest)

After 3 years, when you sell or trade in the car, you’ll likely only get around £18,000 to £19,000 for it. This means you’ve lost between £6,000-£7,000 in depreciation over 3 years. Additionally, you will continue to pay insurance, maintenance, and repairs, which can add up over time.

Leasing Costs

Leasing the same car could look like this:

• Initial Cost: £2,500 (down payment)
• Monthly Lease Payments: £250-£300 (for a 3-year lease)
• Depreciation Covered By Lease: The car’s depreciation over 3 years is accounted for in the lease, so you don’t bear the full brunt of it.

At the end of the 3-year lease, you simply return the car and have the option to lease a new model. There’s no need to worry about the car’s resale value or the depreciation you’ve incurred. You’re essentially paying for the privilege of using the car, without being stuck with a depreciating asset.

The Advantages Of Leasing: Why It’s The Better Option

Lower Monthly Payments: Because you’re only paying for the car’s depreciation, leasing typically offers lower monthly payments compared to purchasing a car with financing.

Drive A Newer Car More Often: Leasing allows you to drive a new car every few years without the financial commitment of ownership. You get access to the latest models, features, and technology without the burden of long-term maintenance costs.

No Worry About Depreciation: With leasing, you avoid the headache of depreciation altogether. When you return the car at the end of the lease, you simply walk away, and you’re not left with the responsibility of reselling a depreciated vehicle.

Warranty And Maintenance: Many leases come with warranties that cover most maintenance costs, meaning fewer unexpected expenses. If your leased car is still under warranty, you won’t have to pay for significant repairs, unlike a car you own outright, which may start incurring maintenance costs as it ages.

Flexibility: Leasing offers flexibility. You can get into a new car every few years without worrying about the long-term financial impact of ownership. This is particularly appealing for those who prefer not to be tied down to a single vehicle for too long.

The Bottom Line: Why Leasing Makes Sense

For many car buyers, leasing is the smarter financial option. While owning a car can be a good investment for those who plan to keep their vehicle for a long time, the rapid depreciation that comes with buying a new car makes leasing a more attractive option for those who like to drive newer models without worrying about the financial fallout from depreciation.

Leasing offers a lower upfront cost, lower monthly payments, and the ability to drive a new car every few years. Additionally, since you don’t have to worry about reselling a depreciated car, leasing eliminates one of the most significant financial challenges of car ownership.

If you’re someone who values driving a modern vehicle without the long-term commitment or the depreciation hit, leasing is likely the best option for you.

This article was produced by New Frontiers Marketing; a digital marketing agency based in South Devon, UK.