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Buying vs. Leasing a Car

Before you roll the windows down, put your foot on the gas and drive off into the sunset, you need to decide: buy or lease? It’s not a fun decision like horsepower or paint color, but it is an important one. Mainstays of the “buy” camp take pride in driving their cars into the ground. On the other side of the ring are proponents of leasing that love getting the latest tech in their new car every few years. But somewhere in the middle are your circumstances, preference, and a little math.

The Basics of Leasing

Leasing allows you to borrow a car for an agreed upon number of years while making lease payments to the lender before returning the car. The average lease term in the last quarter of 2020 was just over 3 years. The amount that you pay in monthly lease payments is a product of the depreciation that will occur during the lease term as well as interest and fees. Everyone has heard the adage that a new car loses a good portion of its value when it is driven off the dealer’s lot. That number generally equals to 20-30% of the car’s value in the first year of a car’s life. As the lessee instead of the owner, you won’t see this decline on your balance sheet, but the car lender still factors this into how they structure lease payments. Car dealerships will usually charge a down payment to enter into a lease agreement. This down payment goes toward reducing leasing costs which in turn reduces your monthly payments. Lease payments tend be comparatively less per month than purchasing the equivalent vehicle, but the downside to this is that you have nothing to show at the end of the lease term. The upside is that you have the flexibility to enter a new lease or purchase a vehicle without worrying about trade-in value or depreciation on the vehicle.

Leasing Pros

  • Lease payments tend be comparatively less per month than purchasing the equivalent vehicle.
  • Potentially lower down payment than purchasing a vehicle.
  • The latest technology package and safety features.
  • The vehicle is covered by the manufacturer’s warranty.
  • You may potentially pay less in sales tax since sales tax is only calculated on the lease payments as opposed to the full sale price when purchasing.  
  • Business owners can deduct leasing expenses.

Leasing Cons

  • Lack of ownership.
  • No equity in the vehicle to put towards your next car.
  • Limited number of miles that can be driven before incurring fees. This limit is usually between 12,000 and 15,000 miles per year. Penalties can range from 10 cents to 50 cents for every additional mile.
  • GAP insurance (Guaranteed Asset Protection) is required. This type of insurance is used to cover the “gap” between the vehicle’s value and the loan balance.
  • Potential limitations on where you can get your vehicle repaired.
  • Bad credit can make it difficult to get a lease.
  • The vehicle must be returned in good condition or excessive wear-and-tear charges may be incurred.
  • It can be costly to end a lease early.

The Basics of Buying

The purchase of a new or used vehicle can be done with cash, the trade-in of another vehicle, financing through a lender, or some combination of the three. When financing a vehicle, the lender will continue to hold the title for the vehicle until the loan has been paid off. The size of the loan is first determined by the agreed upon purchase price and is then reduced by a vehicle trade-in or down payment. You have the flexibility to determine how long you would like to pay down the loan. This length of time, along with your credit score, factor into the interest rate that the lender will charge on the loan. The average loan rate for vehicle purchases in 2020 was 4.3% and the average length of a loan for a new vehicle was 70 months (65 months for a used vehicle). The shorter the loan, the less interest you will pay over the life of the loan. The longer the loan term, the lower your monthly payments but you will end up paying more in interest costs over the life of the loan. Once the loan is paid off though, there are no more payments that need to be made on the car and your savings, compared to ongoing lease payments, really start to hit the gas.

Buying Pros

  • You own the vehicle.
  • There are no further payments once the loan is paid off.
  • You are free to sell the car whenever you want.
  • There are no mileage restrictions.
  • You can customize the vehicle.
  • Whether you like keeping the car clean or throwing wrappers in the back, the car’s condition is your personal preference.

Buying Cons

  • Monthly payments tend to be higher than leasing the equivalent vehicle.
  • A higher down payment may be required to avoid being “upside down” on the loan.
  • You will be responsible for all repair costs once the warranty has expired.
  • You will potentially pay more in sales tax than leasing a vehicle.

What is right for you?

Leasing is likely right for you if you would like a new car every few years, you drive less than 15,000 miles per year and would benefit from lower monthly payments. Buying a car might be right for you if you plan to keep the car for at least 4 or 5 years, you don’t mind if the technology and condition of the vehicle age, and you tend to drive more than 15,000 miles per year. In terms of the life cycle costs of a vehicle, it is important to understand the frequency and cost of maintenance. Does the vehicle require specialized maintenance and imported parts? Or can maintenance and parts be sourced at your local repair shop? It often makes sense to lease higher-end vehicles since the maintenance can be more expensive and the vehicle depreciates faster. Vehicles with high reliability ratings are often better purchases because they will continue to drive well long after the loan has been paid off. Ultimately, the decision comes down to your circumstances, preferences, and financial goals. As always, it is a good idea to consult with a wealth advisor before proceeding.

Sources

https://www. creditkarma.com/auto/i/how-car-depreciation-affects-value
https://cars.usnews.com/cars-trucks/buying-vs-leasing
https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/credit-trends/2020-quarterly-trends/v2-2020-q4-state-automotive-market.pdf

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This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

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