Should You Buy or Lease Your Next New Car?
I’d be willing to bet that a week doesn’t go by without me receiving the big question surrounding buying a new car.
Recently, I’ve received even more than usual so I thought I’d walk you through my thought process on this all important question because I think it’s really important.
To begin with, I’m going to leave the debate of buying new vs. pre-owned for a future blog entry. For today, let’s assume that you’re buying a new car.
In my view, given the enormous cost of cars these days, it’s a very good idea to take the time to evaluate the most cost effective way for you to purchase your cars both now and in the future.
With all the ‘financing’ options you now have available to you, you really have to do your homework.
Ownership Mentality: Appreciating Assets
The first factor that I believe you have to think about is purely economical. What I mean by that is most people have been conditioned over their lifetime to “own” everything in their lives. And, I believe that’s a worthy goal.
However, if you stop and think about that, what you want to own is “appreciating” assets. So, for example, owning your home makes the most sense for the overwhelming majority of individuals. And, it makes sense because house values have traditionally appreciated throughout history. (However, after the lessons of 2008, we all know that’s not an absolute!)
A car, on the other hand, is a “depreciating” asset. In fact, it depreciates rapidly, so you have to really question your desire to own it for “pride of ownership” reasons.
The exception to this, of course, is the individual who “really” likes cars and spends a lot of time working on them and maintaining them as a hobby. And, we have a few Relaxing Retirement members who fall into this category.
Just an Expense
If you really stop and think about it, a car is really just a cost (expense), much like many other expenses you have in your life. It’s really not a very good “asset” from an ownership standpoint.
So, for the sake of this discussion, I consider and equate all money that goes into the purchase and ownership of a car as an “expense”. For example:
- buying the car for cash,
- making a down payment,
- making loan payments,
- making lease payments,
- paying sales and annual excise taxes, and
- repairs and maintenance
These are all “expenses”, and have to be considered in your overall analysis of “how” you’re going to pay for your new car.
When you break it all down, it’s all a matter of “how much” you will pay and “when” you will pay it.
I recognize that most individuals give no thought whatsoever to how they’re going to buy their cars. However, what I recommend is that you have your own personal “long term” car buying strategy. And, that strategy should govern your car purchases.
Before we get into analyzing what would make the most economic sense for you, the question of buying vs. leasing a new car comes down to a few factors:
- your anticipated annual mileage, and
- the make and model of the car (and, in turn, its residual value)
Let’s start with mileage. If you know that you will be driving in excess of 15,000 miles per year, leasing gets pricey because they have to charge you up-front for excess mileage on the car.
Given this, leasing rarely makes sense if you’ll drive in excess of 15,000 miles per year.
Car Make and Model
Depending on the make and model car you wish to buy, two $30,000 cars can have monthly lease payments that are $150 per month different.
How can that be? Well, there are only 3 components to the monthly lease cost:
- price of the car,
- the leasing rate (interest rate), and
- the “residual value”. (The residual value is based on what the leasing company believes they can sell the car after you turn it in 3 or 4 years down the road)
Some cars have terrific residual values: Toyota (Lexus), Honda (Acura), to name a few. Others, unfortunately, do not.
So, for example, leasing a Toyota or Lexus that costs $30,000 is typically cheaper than leasing a Chevrolet or a Ford that have the same sticker price.
Now that we’ve laid this groundwork, next we’re going to analyze the pros and cons of buying vs. leasing a new $30,000 car.