How do you determine whether you should buy or lease your next vehicle? Well, it really depends on what you want out of that vehicle, your financial picture, and who you are as a driver. It’s complicated and involves a lot of moving parts. Don’t worry, we will break it down to help you make an informed decision. First, let’s look at your options:
Option #1: Buy New
New cars are expensive, the average new car is $36,000. Most people can’t pay cash for that new car and would need to finance the purchase. That average car over a 6-year term at 3.25% interest would be about $551.00/month (for a total cost of $39,673.00). That’s assuming no money down. Financing that $36,000.00 car makes it 10% more expensive! Not just that, by the time you pay the car off, it has depreciated massively; meaning its worth a lot less than you paid for it. Not an issue if you keep the car for its usable life.
Option #2: Buy Used
You can always buy a used car. When you buy used from a dealership, it is often much cheaper than a newer model. However, you are saddled with similar dealership markups, taxes, random fees, and the process is very much the same as a new purchase. Sometimes financing rates are higher for used vehicles, but the overall price of the car is usually less even after financing at a higher rate. You can also purchase used from a private party. You can secure financing online if you don’t have the money to buy the car with cash, and although it requires some work on your part, there aren’t those random costs you would see at the dealer. With a private party purchase, I always recommend taking the car to a well-regarded mechanic to have it closely inspected before purchase. In my experience, honest sellers have no issue with that.
Option #3: Car Lease
Leasing a new car probably seems a lot cheaper than buying a new car, and it is (from a cash flow perspective and over shorter terms). Monthly lease payments are lower than a typical auto loan. Think about why that is though: you are only paying for a portion of the vehicle’s usable life. You get to use the car for 2-3 years. If this is a lease on a brand-new car the monthly leasing cost will be higher, but maintenance costs will be lower. A used car’s lease would mean lower monthly payments with a higher cost for maintenance. Just to be clear, even though you don’t ‘own’ the car you are still responsible for keeping it in good repair. Also, getting another lease every few years means leasing is usually the most expensive option over longer periods. You can control how long you keep a car you buy, but you must give a leased car back at the end of the lease term.
When leasing a car, make sure you don’t put more than $2,000 down for the lease. The car could get destroyed or stolen in the first few months, and you would likely get no refund on the deposit. Whether buying or leasing, make sure you talk to an insurance agent about gap insurance. You will be liable for any difference between the car’s depreciated value and the remaining liability on your loan/lease should you get in a car accident. Pay attention to the warranty on the car when leasing. Think about the warranty in terms of who is responsible for the vehicle should it be defective. You wouldn’t want to lease a car past its warranty period. You don’t own the car, why would you want to pay massive mechanic bills?
If you put a lot of mileage on your vehicle each year, you should purchase a car. With leases, you are restricted to something like 10, 12, or 15 thousand miles a year. Heavy commuters need to buy. If you can’t afford an auto loan payment, you may consider a lease (although you should strongly consider buying used in a private sale). If you can afford it, and you want the latest model every few years, you should consider an auto lease. You would get the newest models with the latest tech and features. Finally, consider buying if you are the type of person who dings their car often or gets in fender benders regularly. With a lease, you will have to pay the dealership for any damage to the vehicle that exceeds what they consider normal wear and tear.
Do your homework
The next time you are considering another vehicle, remember that the best option for you should depend entirely on your personal circumstances. As with most every big financial decision in life, understanding your array of options allows you to make the most informed decision. Do your homework and ask questions before you sign any lease, loan, and purchase documents. The details matter!
Drake Qualls is a Financial Advisor at Henry+Horne Wealth Management and can be reached at 480-483-3489 or DrakeQ@hh-wm.com