Do Longer Car Loans Change the Math of Leasing Versus Buying?
With ten-year auto loans shrinking monthly payments, we take a detailed look at the pros and cons of leasing vs financing your next car.
Once you’ve found the model that fits your needs, wants, and budget, you have to decide whether to buy or lease it. Low interest rates have made financing a car easier and more accessible than ever. For many shoppers, it makes sense to take out a long term loan rather than continually swap between leased cars every few years, but that’s not necessarily the case for everyone. Here we explore the costs, advantages, and disadvantages that come with lengthy financing terms.
Car Loan Basics
Four- or five-year terms used to be the norm for vehicle financing, but a number of lenders now tempt shoppers with decade-long loans promising ultra-low monthly payments. Doing so often opens up a buyer’s choices to nicer, more expensive models that would otherwise be out of reach. Additionally, drivers comfortable keeping their cars for a long time may find these low-interest loans appealing.
A shopper who looks at a long loan solely as a means of keeping their payments low may be in for a surprise if they plan to trade for a new car within a few years. However, a car loan is considered upside-down when the buyer owes the lienholder more than the vehicle is worth. It can take years of payments to whittle down the original loan amount until it’s equal to the car’s current value. When that happens depends on the vehicle’s rate of depreciation and the loan terms. Owing more than the car is worth makes trading in for a newer model a potentially costly move since the borrower has to make up the difference or roll it into a new loan, raising their monthly payment.
Lengthy loans also tend not to qualify for ultra-low interest rates that three- or four-year terms offer, so a driver will wind up paying a lienholder more due to a longer loan period as well as a higher interest rate.
Leases allow drivers to hop behind the wheel of a new car every few years while keeping payments reasonable. A leased car can also offer peace of mind, since it is typically covered by the manufacturer’s warranty for most, if not all, of the duration of the lease.
Drivers who spend a lot of time on the road may have trouble staying below the mileage limit, usually in the range of 10,000 to 15,000 miles a year. When it’s time to turn in the leased vehicle, the dealer may charge you as much as 30 cents for every mile beyond the cap. What’s more, charges for excess wear and tear—think dents, scratches, and interior damage—can add up quickly.
Lease Versus Loan: Doing the Math
Let’s follow two different scenarios for someone who wants to park a compact crossover in their driveway for the next nine years. In one scenario, the driver will lease three different vehicles for three years each. We’ll compare that against a driver who buys and keeps a vehicle for nine years. For our example vehicle, we’ll use the Hyundai Tucson. This five-seat SUV was the automaker’s most popular model in the U.S. in 2021, and as such, it has strong residual value that helps keep lease payments relatively low. (A vehicle’s expected residual value at the end of the lease is used to calculate what the customer pays for that lease.)
A typical lease deal on a 2022 Tucson with a base price of about $26,800 requires around $3,700 down and $289 per month for 36 months. Over the course of three years—before taxes and registration costs, which vary by state and county—a lessee would spend about $14,100 in payments to lease that Tucson. This driver then returns the 2022 model to the dealer and drives off in a new 2025 Hyundai. Three years after that, they’re at it again, this time with a 2028 Tucson.
While car prices (and thus lease rates) don’t exactly rise with inflation, vehicles tend to get more expensive every year. Let’s assume, then, that after accounting for the same $3,700 down payment, the 2025 Tucson will cost $299 monthly to lease and the 2028 model will run $309 per month. Accordingly, the 2025 Tucson will cost its lessee about $14,500 over three years, while the 2028 model will run about $14,850. That works out to $43,450 spent leasing three Tucson models over the course of nine years.
Now let’s pivot to the scenario where the shopper takes out a nine-year loan to finance a 2022 Tucson. A borrower with excellent credit may be able to find a 4.5 percent interest rate on a 108-month loan to cover the 2022 model’s $26,800 base price. Assuming they made a $3,700 down payment, a borrower would pay the lender $260 a month for the next nine years. After receiving that 108th payment, the lender would send the Tucson’s title to the borrower, who would own the crossover free and clear. In total, that shopper will have shelled out about $31,800 for the 2022 Tucson, $5,000 of which covered interest payments to the lender.
For comparison’s sake, a buyer financing the same vehicle at 2.0 percent for 36 months would pay about $660 a month, with just $720 going to interest over the length of the loan.
In the above example, taking out a loan costs the driver $11,650 less than leasing three Hyundai SUVs, and at the end of nine years, they still have a vehicle in their driveway. Admittedly, it’s now an old vehicle, lacking the latest features and likely showing a few dings, but at least it’s yours. The habitual lessee, on the other hand, has to search (and pay) for another ride.
That may sound like an outright win for the lengthy loan, but an older vehicle often costs more to maintain than a new one. Hyundai includes a generous five-year/60,000-mile bumper-to-bumper warranty on its vehicles, but that still means the buyer is on the hook for at least four years of potential repairs.
Additionally, automakers occasionally offer incentives to encourage habitual lessees to stay loyal and return for another lease. Sometimes these special deals include the ability to get out of a lease early or provide cash back that can erode some of the lease’s added cost. To determine which course of action is best, consider what’s important to you—low payments or low overall cost, the latest features, less maintenance hassle—and do the math.