The decision to get a new vehicle is sometimes made for you, such as when your old car breaks down and the repairs are too costly to justify.
On the other hand, sometimes, purchasing a new car is an impulsive decision after seeing a multi-million-dollar advertising campaign on television and getting that “must have” urge. And sometimes, it’s in between; you have had your car for 10 years and you deserve a new car with the latest technology and safety features.
In either case, while the new vehicle buying process is typically exciting and fun, it may also be stressful, as you figure out how to pay for your new and shiny ride.
Likely, after countless hours researching your new wheels on the Internet and visiting a dealership or two to test-drive the vehicle, you have selected the make, model, options, color and the rest of the “bells-and-whistles.”
Then comes the not-so-fun part: Can you afford the vehicle you selected, and what is the best way to pay for it? After you add on the metallic paint, technology package, upgraded sound system and destination charges, the total price after taxes and other charges may be more than you were expecting the vehicle to cost.
The first step is making sure you can afford the car. Do you have the cash to pay for the vehicle, or will you have monthly payments? If you have been diligently saving and can write the check for the vehicle, that solves this question.
Is paying cash for a vehicle the best option? That is a topic for another day. The point herein is making sure, while considering cash flow and long-term savings goals, you can afford the new vehicle; and, assuming so, what the best way to pay for it would be.
More specifically, should you buy or lease? Neither leasing nor buying has a clear advantage over the other. Many of the advantages and disadvantages depend upon your personal preferences and needs. While there are many considerations, there are three big questions you should ask yourself.
When you buy a new car, you typically need a down payment, which can be in the form of cash and/or a trade-in. You may have to come up with 5% or more of the new car’s value, depending upon factors such as your lender and credit rating. When you lease a car, there’s typically no down payment. Instead, you’re usually required to make the first lease payment and provide a security deposit equal to one or two monthly payments. If you don’t have the cash or trade-in for a down payment, but need a car now, leasing might be the best choice for you.
When you buy a car, your monthly payments are based on the total purchase price, down payment, term of loan and interest rate. Alternatively, when leasing, your payments are based on the car’s expected depreciation over the term of the lease, state sales tax, your credit score and a lease fee.
All things equal, the monthly lease payment is usually lower than the monthly loan payment for a comparable car. As compared to buying, if you want to get “more car” for your dollar in the short-term or if your monthly cash flow is tight, you probably will do better with a lease, since the combination of a low initial down payment (i.e., security deposit and first monthly payment) and the lower monthly payments may be appealing.
Could Be a Keeper
Leases typically run two-to-four years, and at the end of the lease you can switch to a new car. If you like the idea of driving a new car every few years, leasing may be a good choice for you. At the end of the lease term, you drop the car off at the lease company, pick out a new car, sign a new lease and drive away.
There’s no haggling over trade-in allowance and no worries about loan payoffs or down payments. That is a big advantage of leasing.
While you can still get a new car every few years even if you buy, you typically will need to sell your old vehicle. This generally involves negotiating the value of your trade-in or advertising in the local paper or on a website, such as Auto Trader. Be prepared to deal with inquiries and showing the vehicle to prospective buyers if you decide to advertise on your own. If you plan to keep your cars for more than four years, then it may be better to buy. When you buy a car, whether you purchase it outright with cash or use a loan, you own it free-and-clear (once the loan is paid off, if you borrowed).
Since you own the car, you can drive it as long as you want, sell it or trade it in for a new car.
Contemplate your driving habits. A typical lease will include 12,000 to 15,000 miles per year. If you exceed this limit, at the end of the lease term you could be charged a per-mile fee for each mile over the contract limit. As mentioned above, when you buy a car, you’re free to drive it as much (and as far) as you like. So, if you drive a lot, buying may be a good option.
Most leases only allow “normal” wear and tear. If you are tough on your car, live in a crowded city or typically park on the street, a lease may not be the best choice since you will have to pay for any damages the dealership dictates are above the “normal” wear and tear (dings, dents, cracks, stains, tears or other unusual wear).
And remember, those repairs you may have to pay for are a complete loss since you are turning the car back in to the leasing agency.
Compared with buying, if you have wear-and-tear that is excessive, you can decide to live with those dings and dents, or repair them. Since it is your car, you benefit from the repairs, not the leasing agency.
One or the Other
Remember, neither option is inherently better than the other. It all depends on where you are in your life, what you’re looking to get out of your vehicle and your financial situation.
As with any major purchase, it’s always best to have a discussion with your financial adviser to educate yourself, and weigh the pros and cons of each option before making a decision.
Gary S. Williams is the president and founder; and Nicholas Ibello is wealth manager and associate vice president; of Williams Asset Management, in Columbia. They can be reached at 410-740-0220 and [email protected] or [email protected].