Leasing vs Financing
The “Should I finance or lease my car” question is too often frames as a solely financial one. Dollars and cents, are important, now more than ever for most of us, but that’s really not all that the debate is about. As we move further along into the 21st century, a car is a tool for some, a commodity for others, or sometimes even a toy. Some of us look at a car like an appliance, something that does little more than transport us from point “A” to point “B” while others look at a car as an extension of their personality. (I fall into the latter with my 1970 VW daily driver!).
When looking at your next car purchase this becomes framed in over-all value that you get from your car. Lets be honest, that’s an entirely subjective measurement. That’s why I say the choice of whats best is more than just “how much will I pay for this car if I lease vs buy.”
What are your Buying Habits?
There are a few black-and-white situations where for 99% of us financing or buying a new car is absolutely the best way to go.
- If you know from your buying/car ownership history you buy a car and keep it for at least two years AFTER paying of the loan (generally 5-6 years these days) then there is little point in leasing. Even with the option of buying out your car at the end of the lease, you will pay more leasing and then financing the balance in almost every case. If you keep your cars forever, leasing is not for you.
- If your primary motivation is making the best long-term financial decision in regards to being debt-free, then you should focus on financing and avoid leasing. Leasing is awesome for some of us (my family car is always leased) but some financial advisers like Dave Ramsey of Financial Peace University have extremely strong views of leasing. Finance the car if you can’t pay cash, pay it off as fast as possible, and then keep it as long as possible.
- If you drive 20,000 miles per year or more, chances are a lease will be a terrible idea. There are a few exceptions in cases where the lease is used as a tax write-off but for most cases, going much past the standard lease mileage plans will end up with you paying a LOT more than you should. Buying a reliable car that will take the amount of miles you’ll put on it is better than getting into a lease that will leave you in a bad position a couple years down the road.
In contrast, there are also situations where Leasing is actually the best financial decision to make. Again, these depend largely on your own buying motives so please know this is subjective. I am not nor do I purport to be a financial adviser, I just see what happens when people in these situations make the wrong choice and are hurt in the end.
- If you know from your personal experience that you, like a large portion of the US population don’t keep a car more than 2-4 years, you should lease. If you’re going to buy a car every 2-3 years, for whatever reason, you will lose a boatload of money either paying cash or financing. Cars are depreciating assets, not investments. That means that $30,000 car you just drove off the lot last night is now worth about $20,000 and if you’re financing, you won’t owe only $20,000 for a couple years, and by then the cars only worth $15,000! Trade that in on your next $30,000 car and you’re paying $35,000, not $30k because of the negative equity. Leasing gives you a shorter term with significantly less risk.
- If you’re in a period of life where things are changing constantly. I’m talking to you newly-weds and recent college grads! If you don’t fall into one of the categories listed above for financing, leasing your new car gives you flexibility financing cannot. I’ll expand on these two scenarios…
- Newlyweds/Growing Families – The car that holds two of you may not end up being the best car once your first child comes along. Do multiples run in your family? LEASE! When you find out you’re having twins or triplets, that cute little sporty sedan you have is getting traded in fast and if you’re financing, you could be left in a bad spot. Leasing gives you flexibility.
- College grads – The average starting salary of recent college grads is around $45,000 (1) most often this starting salary has increased after 3 years leaving a twenty-something who’s no longer in an entry-level job who wants something more than an entry-level car. Again, if you don’t fall into one of the Must-Finance categories, leasing is most likely best for you.
- If you’re terrified if having a modern car out of warranty – Go find the cheapest little new car you can find on sale for $10,000. If the transmission goes out 4 years from now, that can be in the range of $1500-$3000 for a basic car! Get a fancy dual-clutch automatic transmission found in newer performance cars and that can go up to $5000 and more! If you’re more content always having a car payment but not having to worry about major maintenance or repairs out of warranty, leasing is probably the best way to go.
No matter what, you new to have peace of mind in the direction you go. Again, VALUE is subjective. I’ve had plenty of customers that just don’t “get” the idea of a lease, even if it makes the most sense for them on paper. Having peace of mind using a method of payment that you understand can be worth more than just a specific dollar amount. Me personally, my own car of course was bought and I’ll keep it as long as possible. Our family car however, we lease to give us lower payments, warranty coverage, and flexibility if our family’s situation changes.
You need to do what you feel most comfortable with, but if you fall into any of the listed categories, chances are you’ll be happiest in the long run if you follow these methods.
Need help deciding?
Contact me for assistance in getting a new or pre-owned car the way that’s best for YOU!