Car Shopping – Lease or Buy?
We’re all barraged by those ads offering up cars at unbelievable prices…..until we check the fine print. Most of those low monthly payment ads are for car leases rather than outright purchases. So should you lease or buy your next new car?
I wish I could give you a simple answer, but I can’t. The answer depends on what’s important to you. Let’s look at the differences between the two types of financing to get a clearer picture.
A lease lets you buy a certain amount of time in your car. After that time is up, you return the car to the lease company. When you finance a lease, you’re paying for just the amount of time that you want the car. Let’s say a car costs $20,000. It’s calculated that in 36 months, the car will be worth $12,000. Your lease payments for a three year lease will be based on $8000 ($20,000 less $12,000) plus interest and fees.
If you purchased the same car, your monthly payments would be based on the $20,000. The monthly payments here are almost always higher, BUT, you still keep the car when the payments are done. You own the car.
So how to decide? If it’s important to you to have a new vehicle every three years or so, then leasing is a good choice. If you plan on keeping a car for 7 or more years, then purchase may be better. If you have very little cash for a down payment, many leases require very little up front. If you put on a lot of mileage, owning is usually preferable because of limits on the miles available in the lease period. Don’t forget that any financial obligations undertaken now can continue into an estate after you’re gone so Suddenly Solos need to think about what are realistic time tables for themselves.
Be aware that turning in a car at the end of a lease can be an expensive affair. They will expect the tires in decent shape, the body in good shape, and the interior clean and unblemished. They will check the mileage and charge you for every mile over your stated limit. Many people land up paying hundreds of dollars at lease-end.
You’ll need to figure out what’s important to you, and how much wear and tear you think the car will get. Then you can crunch the numbers and see which plan fits your budget and your lifestyle.
Lynn R. Najman, CFP, AWMA