Cars: Should You Buy or Lease?
This last week I had to re-register my car. It cost me $200. The same day I had to buy new windshield wipers, which was another $50. That got me thinking about how much money we spend on our cars. What I found is that on average, Americans spend 13% of their household income on transportation and personal vehicles account for 90% of those expenditures.
So, what makes cars so costly? First, you have to buy the car either outright or with monthly loan payments. Then there’s insurance premiums, gas, yearly registration, periodic oil changes, new tires, and there’s bound to be some sort of electrical or maintenance issue that will need to be fixed — so many expenses just to get from point A to point B.
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Whenever I’m in a situation where I have to put more money into my car, I find myself wondering if leasing might be a better option than owning. In most places you’ll need a car to get around, but does it make more sense to lease or buy? As with almost all financial decisions, there’s not a right or wrong answer.
Buying
Buying a car is fairly straightforward. You either purchase it upfront with cash or take out a loan. Auto loan lengths range from 3-7 years. The benefit of having a loan payment over a lease payment is that each payment goes toward owning the car outright.
Ideally, these loan payments would go toward building equity in the vehicle. The problem is that cars are a rapidly depreciating asset that require constant upkeep and maintenance costs. After depreciation and expenses, a car will be worth far less than the money you’ve put into it.
A car’s value decreases around 20% to 30% by the end of the first year. Then about 15% per year after that. In five years cars lose about 60% or more of their initial value.
Although cars lose a lot of their value over time, there are still benefits to owning.
Buying a car might be for you if:
You like the flexibility of owning your own car. It’s yours to do what you like with it.
You can afford a down payment.
You eventually want to be free of car payments.
You prefer driving one car for a long time. The longer you use your car, the less it costs.
You like buying low-price, used cars after the majority of its value has already depreciated.
You want lower insurance premiums.
Leasing
Leasing is becoming more and more common; about three in 10 new cars driven off new car dealer lots are leased. When you lease a car you’re renting it from a dealership for a certain length of time, usually three to four years. Instead of purchasing the car upfront, you make monthly lease payments. Once the lease period ends you return it to the dealership — or you can purchase it for a predetermined amount.
The main benefit of leasing is the lease payments are generally much lower than the monthly loan payments for a new car. There’s also little or no down payment required. So, with a lease, you might be able to afford a more luxurious car than if you were to buy. You can also lease a used car, but it’s much less common than new car leasing.
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The downsides of leasing include a mileage limit, extra fees if you return the car banged up, and surprising lease-end costs. Lease agreements vary and how favorable the terms are will come down to the specific agreement.
Leasing a car might be for you if:
You like the feeling of driving new, nice cars. You can get a new car every few years.
You are comfortable with always having a car payment.
You don’t want to worry about maintenance costs. Most lease agreements cover repairs and unforeseen expenses.
You don’t want to worry about reselling your car. Some people don’t like to haggle and trading in a leased car is easy.
You use your car for business purposes. The IRS allows you to deduct both the depreciation and financing costs that are part of each lease payment.
You have less than ideal credit. Leasing companies typically aren’t as strict as lenders.
Conclusion
Buying involves higher upfront and monthly payment costs, but you own something in the end. Leasing has lower costs, but you will always have a monthly lease payment. Leases often are cheaper in the short term, but in the long run, buying a car typically makes the most financial sense.
In the end, cars are an expense. How you want to pay for that expense is up to you. In my opinion, you don’t come out a winner with either option. As it turns out, getting from point A to point B is going to cost you more than you think.
Thanks for reading!