After housing, the largest monthly expense for the average American is transportation. According to Bob Sullivan of MarketWatch, 16% of the average American’s paycheck is spent on transportation costs. For that reason, making an educated decision on whether to purchase or lease your next vehicle is extremely important for your personal finances.
As a wealth manager, my goal is to help clients make financial decisions that will maximize their family’s wealth. With that being said, living a comfortable lifestyle today is usually a higher priority for clients than living on a diet of ramen and frozen pizzas so they can retire a year earlier.
Benefits of Leasing
Think of leasing a car as paying for the part of the car’s life that you’ll use. Therefore, monthly payments are essentially “rent,” and cannot be recouped in any way (unless you own a business, lease payments become tax-deductible). There’s usually a small amount due at signing, and the remaining balance of the cost is “termed out” over the life of the lease.
Lower Monthly Payments (and Down Payment): When you enter a 3-year lease, your monthly payments are based on the 3 years of depreciation that you’ll put on the car. For that reason, monthly lease payments will be lower than what loan payments would be on the same car. It is important to remember that this will be slightly offset by the increased cost of auto insurance that the dealership will force you to purchase on their leased cars.
The downside is that if you’re driving a leased car, your payments will never go away.
Option to drive a new car every few years: If you don’t intend to drive your car for more than 3-4 (or so) years, leasing your next vehicle is a smarter financial choice. If you plan to get a new car each time your auto loan becomes paid off, you would've been better off leasing in the first place.
No selling involved: If you’ve ever tried to sell a vehicle before, you’ll agree that avoiding the selling process is a HUGE benefit. Trade-in programs at dealerships are designed to buy your old car at a significant discount for what you could find elsewhere, so it’s important to do your research before deciding to trade it in.
Repairs typically covered by warranty: Car maintenance and repairs are a major wild-card depending on the vehicle’s reliability. When you lease a vehicle, the dealership is responsible for most of the ongoing maintenance and repair costs. It’s important to read through the section on the lease agreement describing what’s covered and what’s not.
Benefits of Buying (or Financing)
Stretching your dollar as far as possible: the best way to “maximize your wealth” is to purchase a lightly used vehicle, and to own it long after the loan is paid off. Your monthly payments will drop off after the loan is paid in full, and you’ll own an asset that can eventually be resold-- even if you get very little for it.
You intend to drive the same car for more than a few years: If you like your car and want to keep it for more than a few years, purchasing (either outright or through an auto loan) is the best option. Unlike leasing, you can pay off the loan sooner than scheduled by making extra payments on a financed (purchased) vehicle. As soon as the loan is paid off, you own the car outright, and can remove the monthly obligation from your budget.
No mileage limits: If you purchase your car, you can drive it as many miles as you’d like. In the case of leasing, you’re typically restricted to driving a maximum of 10,000-15,000 miles per year, with hefty penalties for exceeding the limits.
Only buy the insurance you need: If you decide to lease your next vehicle, the dealership decides how much insurance is needed, because they still own the car. Because of this, you’ll almost always be required to purchase more insurance on a leased vehicle than you otherwise would if you had purchased the car.
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