Written by: Corey Janoff
This post was originally published on our previous blog website on March 21, 2017 and has since not been revised and/or updated.
As my wife and I expand our family, we are quickly learning that our vehicles need to expand a s well. Both of us got our respective cars before we were even married. Both are still in great shape and have a lot of useful life left in them. However, with minimal trunk space and a dog and a car seat in the back, there isn’t much room. If we want to take a weekend trip somewhere, we simply don’t have enough room for all of us and luggage. So, we’re in the market for a new car.
One of the more common questions I will get from clients who are car shopping is, “Should I buy or lease my car?” Now that I am faced with the very same question, let’s walk through my thought process.
Ownership vs. Renting
When you purchase a car, you own it. You can do what you want with it. You can drive it into the ground. You can sell it if you want. It is your asset. You could choose to pay cash or finance the purchase, but either way, you purchase the entire car.
A lease on the other hand is not ownership. You are renting the car for a predetermined time period. After that time is up, you have to give the car back (some leases have an option to buy the car at the end). Because you don’t get to keep the car forever, you only pay for the value of the car while you use it.
How Does This Work?
For example, let’s say you have your eye on a $30,000 car. If you purchase the car, you can either pay all $30,000 up front, or take out a loan for some or all of the balance and pay that loan off over time. Currently, if you have good credit, auto loans generally carry a very low interest rate, so the cost of borrowing is often minimal. Some dealers will even offer a 0% interest rate, meaning there is no additional cost at all for stretching your payments out over a few years.
Let’s pretend we finance the car over five years and the interest rate is 1.9%. We’ll put a $3,000 down payment, because the lender requires it in this example and will finance $27,000. Our monthly payment would be $472/month. Total payments of $28,320 (so it costs us an extra $1,320 to pay the car off over five years instead of all up front). After five years, we own the car outright.
If you lease a $30,000 car for three years, you only pay for the expected value of the car during the first three years. Cars tend to depreciate pretty rapidly, but let’s pretend the value of the first three years of this particular car is $12,000. This means that after you drive the car for three years and return it to the dealer, they could presumably sell it for $18,000. Now the dealer has to turn a profit, so they will likely charge a little more than $12,000 to borrow the car for three years, but you get the idea.
So, let’s pretend we choose to lease this car instead of purchasing it. To lease this car for 36 months, the dealer is charging $299/month. Often there is an amount due up front as well. For consistency purposes, we will pretend the amount due at signing is also $3,000. So we pay $3,000 up front and $10,764 over 36 months, bringing our total cost to $13,764. However, after three years, we have to turn the car back in and figure out what we are going to do for transportation (buy a car, lease another one, hire a limousine, etc).
Other Considerations
Maintenance and Repairs
When you purchase a new car, it will often be under warranty for the first few years, so you won’t have to pay for any maintenance or repairs if something goes wrong with the manufacturing (aside from regular wear and tear or damage caused by you or someone else), but after that, you are responsible. If it is a minor ding or scrape, you could choose not to fix it.
When you lease a car, they’ll pay for the required maintenance, but any damage beyond normal wear and tear, you will be responsible for fixing it and be required to pay for those costs when your lease is up. Remember, it isn’t your car, you are borrowing it, so you have to return it in tip top shape.
Future Resale/End of Lease Term
If you decide you don’t want to own the car anymore, you are responsible for selling it. It can be a headache to try and sell a car and get the value you want. If you despise haggling, this could be a major turn-off.
With a lease, when the term of the lease is up, you turn the car in and walk away.
Changing Your Mind
If you purchase a car and after a year or so decide you don’t want it anymore, you can trade it in or sell it. If you lease a car, there are often penalties for terminating the lease contract early.
Customizing the Vehicle
If you own your car and want to put in a new sound system, add a rack on top, get some spinning rims, or paint a dragon on the hood, then go for it! It is your car, you can do with it as you please.
If you lease a car, there are often strict rule against making modifications to the vehicle. The dealer wants to be able to sell it when you return it and not everyone has the same tastes as you.
Final Question – What is the Main Reason for Getting This Particular Car?
The answer for this question will often point you in the right direction. For us, we want to get an SUV with more trunk space and a rack on top so we can fit a car seat and a dog and carry additional belongings on a road trip. We like to go to the beach for the occasional weekend and make a road trip to Montana every summer to visit my wife’s extended family. We don’t want the minivan or a vehicle with a third row of seats, but may need one of those in a couple years if we succeed in keeping our first child alive and add another kid to the mix. She currently has a car payment of around $350/month and we will likely trade in or sell her car (less practical than mine for our family) and we would like the new car payment to be at or below the current one.
Given the above considerations, we are leaning towards leasing. The car may only be suitable for a few years if we expand our family and want to get a larger one. The monthly payment to lease the cars we are looking at would be within the desired budget, but the payments on a purchase would likely exceed where we want to be at this point in time. Given cars are a depreciating asset, unless we plan on keeping the car forever (which we probably won’t), there isn’t much sense in purchasing it and paying a larger amount.
There you have it! Our ideas may change once we actually start test driving cars, but this is our preliminary thought process.
