My first car broke down one winter a few years ago. I honestly had never considered what I would do when it came to the end of its life. After struggling to get around without a car, I took a week or so to examine my options — buying new, buying used, and leasing — and choose my next vehicle.
Ultimately, I decided to lease. One of the main reasons was because I wasn’t sure if the car I picked was really the one for me. I also was looking for the cheapest monthly payment I could find. Prior to that point, I’d never had a car payment and I didn’t have much wiggle room in my budget.
Today, I’m on my third leased vehicle, mainly because the deals I’ve gotten have been so tremendous. I also appreciate the reliability of driving a new vehicle that’s still under warranty, especially after experiencing countless unexpected repairs on my first car. That being said, every time my car comes up for renewal, I take the time to reconsider all of my options. I hope you do, too.
In the market for a new (or new to you) vehicle? Here are some things to consider:
· Monthly Payments: You will generally have a lower monthly payment in a leased vehicle, but you’ll have to continue paying until the end of your lease. If you purchase a vehicle, you may have higher monthly payments, but at some point you’ll no longer have a car payment.
Tip: If you choose to buy your vehicle, make sure you investigate all of your financing options. Credit unions, in particular, tend to offer the lowest interest rates, which can help you secure a lower monthly payment and shorten the life of your loan.
· Down Payment: Despite commercials promising you can get into a vehicle for $0 down, it’s more than likely you’ll need to make a down payment, whether that’s in the form of cash or trading in an old vehicle. Experts recommend putting 20% down, but the average is closer to 12%. The more you pay upfront, the less your monthly payment. Your monthly payment will generally drop by $20 for every $1,000 you put down.
Tip: If you’re buying the vehicle, you’re going to want to put as much as you can down since that will lessen your monthly payments. However, if you are leasing, all the down payment will do is reduce your monthly payment. Since this down payment won’t give you any additional equity (or ownership) of the vehicle, it’s best to put down only the amount you need to achieve a manageable monthly payment and cover tax, title, and license. Curious how much you should put down? Check out this Autotrader article.
· Warranty: One of the big advantages of leasing is that you’re driving a car that is still under warranty. If something breaks, you likely will not be responsible for the cost. However, if you’re buying an older used vehicle that’s out of warranty, you’ll owe the cost of those repairs out-of-pocket.
Tip: If you’re buying used, look for a car that still has a portion of the warranty period left. Some dealerships will offer extended warranties on used vehicles — consider taking advantage of those.
· Vehicle Needs: Consider how you will be using the vehicle: Are you planning to transport clients to business meetings or haul your kids home from soccer practice? With a lease, you’ll need to keep your car’s interior and exterior in good condition. How many miles do you plan on driving the vehicle? Many leases allow about 12,000 miles per year. If you go over, you may be responsible for an additional fee. Are you planning to make any modifications to your vehicle? If so, you’ll want to purchase it, so you can do what you wish and not have to return the vehicle in the same condition at the end of the lease.
Tip: If you use your car for business purposes, you may be able to deduct the some of the expense. Find out more in this the balance small business article.
· Length of Time: If you anticipate keeping the vehicle for the foreseeable future, buying may be a good idea. If you are only looking to use the vehicle for a few years before upgrading to something larger, a lease may be a good option.
Tip: Whether you lease or buy, you’ll likely keep your vehicle for at least three years. Be sure to consider your needs for that entire period of time, not just your needs today.
· Values: Financial gurus often point to cars as spending that doesn’t add to your household worth. But you may be a person who really takes pride in their vehicle, or who cares about having the latest technology. That’s ok! As long as you’ve got your other financial ducks in a row, there’s nothing wrong with making your car one area of discretionary spending in your budget.
Tip: If you’re in a partnered relationship, be sure to talk together about what matters to each of you. For my husband, his car is a source of joy. For me, it’s a means of transportation. We spend about 1/3 more on my husband’s car than we do on mine. This allows us to honor his values without going overboard. It also allows me to save my discretionary spending for something that matters more to me.
· Equity: One of the biggest cons of leasing a vehicle is that you have no equity at the end of the lease. You are returning a borrowed vehicle – it has no trade-in value for you. This is very important to understand. There are a few exceptions to this like if you leased an in-demand vehicle or put very few miles on your vehicle, the dealership may offer you extra incentives toward your next purchase or lease if you chose to give them the car rather than buying it yourself. However, these situations are rare and sometimes complicated.
Tip: If you choose to lease your vehicle, set aside money every month to put toward your next vehicle. How much you’ll need for your next down payment will depend on the market, the available deals, and the next vehicle you chose. My husband and I generally put away about $2,000 total to cover tax, title, license, and down payment on the next vehicle. That means putting aside about $55/month over three years.
· End Goal: Are you hoping to eliminate having a car payment? Drive a car with the latest bells and whistles? Have a reliable vehicle with no additional repair cost? Naming what you ultimately want can give you confidence in whatever decision you make.
Tip: Even though it may cost more up-front, buying a vehicle can make more financial sense over the long-term since hopefully you’ll eliminate having a car payment after a few years and you’ll retain equity in the vehicle. But if you’re looking for a less expensive way to get into a newer vehicle and you don’t mind having a perpetual car payment, leasing can still be a great option. To help you weigh the costs associated with both, check out this nerdwallet article.
Leasing vs. buying: What has your experience been like? Share below!
On this week’s Facebook and Instagram Live on Thursday, Mar. 14 at 8pm (Central), my husband will be joining me to talk about the basics of car insurance. See you there!