By Bennett Whitlock, CRPC®, Private Wealth Advisor
What’s the best route to acquiring a new and reliable set of wheels? Choosing the make and model of the vehicle you wish to drive, and other factors like amenities and mileage, is important. However, from a financial standpoint, one of your most important decisions is whether to lease or buy.
Leasing a car
When you lease a car, you generally make an up-front payment and agree to make monthly payments for a new car during a defined period of time. Lease payments cover the vehicle’s estimated depreciation (how much value the car loses during the time you own it) and finance charges, but they do not help you build equity or ownership in the vehicle. Most lease agreements have an annual mileage limit, and you may incur a fee if you drive more than the amount allowed. Calculate your annual mileage from the last few years, so you can negotiate a limit that fits your lifestyle. With an open-end or equity lease, you agree to purchase the vehicle for a predetermined price at the end of the lease. With a closed-end lease, you can walk away from the car once any outstanding fees are paid.
Advantages Leasing allows you to drive a new car every few years with lower monthly payments and, occasionally, with no down payment. When the lease ends, you don’t have to worry about finding a new owner for the car. In many cases, if your car requires maintenance or repairs, the costs will be covered by a manufacturer’s warranty.
Disadvantages Despite offering more affordable monthly payments, leasing rather than buying a car will cost more over time. This is because you won’t be able to sell the car and recoup some of your costs when the lease is up. Additionally, you’ll pay the car’s depreciation when it is at its highest (in the first few years of ownership), and the newer vehicle may be more expensive to insure. You may be charged a penalty if you want out of the lease early.
Buying a car
A big factor to consider when you buy a car is how long you intend to drive it. Knowing your length of ownership will help you prioritize various features. Keep in mind that if you’d like to eventually sell or trade-in your vehicle, some cars hold their value better than others. Regular maintenance and careful driving can help retain your car’s resale value.
Advantages In the long run, buying a car is generally a better bargain than leasing, assuming you keep the vehicle for several years after the loan is paid off. This is because you will own the car and be free of monthly payments at the end of the loan. If you finance a used car rather than a new one, your potential savings are even greater.
Buying gives you the flexibility to keep the car or sell it at the end of the loan. You also have the freedom to drive as many miles per year as you like (although high mileage does affect resale value).
Disadvantages Buying a car typically costs you more up-front in the form of a down payment. While this amount is negotiable, its size will affect the amount you pay in interest and the length of your loan. As a car owner, you are responsible for repairs, which may add up over time.
Making the decision
Think about your financial circumstances and preferences when you’re deciding. Find a reputable car dealer and ask questions before closing the deal. Compare specific offers with an online lease or purchase calculator, which allows you to plug in actual lease or loan terms. Ask your financial or tax advisor to help you assess the impact of buying versus leasing a car on your financial situation.
Bennett Whitlock, CRPC ®, is a private wealth advisor and managing director with Whitlock Wealth Management, a franchise of Ameriprise Financial Services, Inc. Learn more at WhitlockWealth.com or call 703-492-7732.