Looking for cars can be one of the most fun things we do in life. Heck, let’s just say it: car buying is about as American as apple pie! Cars are part of our past time and a huge part of our culture. But for many, making that final decision and signing the dotted line can also be quite a daunting experience. That’s why I’m here to guide you through it all.
In addition to our homes, cars are one of the biggest purchases we make in life, a decision that should not be taken lightly. Careful consideration should be taken as to the type of transaction we should undertake before driving off the lot.
Lease, buy new, or buy used? The answer to this question is both financial and personal, so let’s take a quick look at the benefits and drawbacks of each option before I sum it all up with my take.
Let’s talk about the lease:
In a lease, the dealer and buyer will agree upon an annual mileage limit, and the monthly lease payment will be calculated as the predicted depreciation (more depreciation with larger mileage limits) of the car divided by the number of months of the lease. The dealer will also tack on a “finance charge”.
Long story short, if you’re the type of person that gets bored easily and needs to have a new car every few years, leasing is definitely the way to go.
1.) Your car will ALWAYS be under warranty. Most lease periods (typically 24, 36 or 39 months), are well within the manufacture’s “bumper to bumper” warranty, and therefore, you won’t be hit with unexpected and expensive repairs during your lease term.
2.) Lower payments vs. buying a new car. Many people choose to focus on monthly payment when considering a car lease or purchase (though its always better to focus on price), and leasing generally requires a lower monthly payment compared to buying that same car new.
3.) Brand, spankin’ new car every few years. For those placing a high value in having the look, feel, and panache of a consistently new car, leasing satisfies that inner desire to constantly “turn over a new leaf”.
1.) Mileage limitations. As part of the negotiating process when leasing, a buyer must choose a satisfactory annual mileage limit over the course of his lease term, with larger limits increasing the monthly payment (see above). Breaking the mileage limit will subject the buyer to penalties when returning the car after the lease period ends.
2.) Perpetual car payment. At the end of the lease term, you are left with no residual value with which to trade in on another vehicle. Instead, you must lease again, or buy another car.
Let’s talk about buying new:
Consider buying new if you need the peace of mind of being the car’s first owner and you plan on holding on to the car for many years.
1.) Less expensive to own over the long term vs. leasing. All else being equal, monthly payments on a traditional 60 month purchase loan will typical be more than leasing. Unlike a lease, however, eventually you will own your car free and clear. If properly maintained, today’s more dependable car offerings should provide many more years of payment free ownership. Consider these payment free years as money in the bank.
2.) You keep some equity for trade in. Although you’re going to experience some serious depreciation over the life of you’re ownership, the biggest hit (about one third of initial value) will occur in the first few years. After that, depreciation should occur more slowly, leaving you with at least some equity value following the end of your loan term.
3.) No limits on mileage. Feel free to drive your car as much as you need to. This proves especially beneficial for drivers requiring long daily commutes or for those seeking the adventure and intrigue only offered through long road trips. Enjoy the open road for all its splendor!
1.) Monthly payments are steep. As mentioned above, monthly payments on a typical 60 month car loan can be fairly substantial relative to a similarly leased vehicle. But eventually they drop to zero (while a lease is perpetual in theory).
2.) Your car will outlast your warranty. Ok, not necessarily if you trade in your new car every few years. But trading in a new car in that short time span is a huge no-no (more on this later). So if you plan to hold on to your ride for a while, just know that the manufacturer’s general warranty will expire somewhere between 36 and 60 months. You’d be on the fence for repairs unless you buy an extended warranty down the line.
3.) Depreciation’s a real bitch. As soon as you drive that shiny, clean new car off the lot, be prepared to say bye bye to a huge chunk of value. You’re new car has magically become a used car in the blink of an eye. Oh, and get comfortable with the fact that over the next few years, it will probably lose more than one third of its original value. If you chose to forgo a large down payment on the original purchase, you might even find yourself “upside down”, meaning the car’s value has dropped below the amount you owe on the car.
And finally, buying used:
Here’s the part in the article where by bias shows its true colors. News flash: I’m a big proponent of buying used cars as the most viable, and financially savvy move. Obviously there’s a huge divergence in quality, age, and mileage when one refers to a “used car”, but when I use the term “used”, I’m referring to a car 2-4 years old with mileage somewhere under the 40k mark. This is what I consider the sweet spot for quality and value.
1.) Some other poor schmuck took the depreciation on the nose. So here you are looking at a car that’s now a few years old. Congratulations, you can be the owner of a car that’s really no different than it was three years ago for about 2/3 the price! Looking at the Carfax report and employing a good old fashioned mechanic to inspect the car prior to purchase ensure that you are buying a quality car for a more than quality price.
2.) Monthly payments are lower than buying new. If you’re curious about what type of payment to expect, look at a few used vs. new options at www.cars.com and try this payment calculator to get a sense of the monthly payment difference.
As an aside, you can come pretty close to matching the advertised payments of a new car lease with a 2-3 year old used purchase loan. Best of both worlds!
3.) “Certified pre-owned” lets’ you have your cake and, well, you know the rest. Certified pre-owned are late-model cars (again in that 2-4 age sweet spot), that have been inspected, refurbished, and certified by a manufacturer or other certifying authority. They also typically include an extended warranty, special financing, and additional benefits.
1.) You can’t tell your friends you bought a new car. Pretty self explanatory – you shouldn’t be concerned about this unless you are unhealthily insecure. Maybe you just need new friends.
2.) You have to haggle with a used car salesman. Check out some helpful negotiation techniques here at one of my favorite car sites for pricing and reviews, www.edmunds.com. And most importantly, keep your cool!
3.) You might have to forgo the latest tech. A three year old car means three year old technology. But seriously, unless the car has undergone a serious refresh or new model design, you’re probably just fine. A new car would have three year old technology in three years anyway!
So there you have it. If you’re a value conscious buyer who loves a good deal, buying a used car is definitely for you. Buy it and then drive it into the ground. As mentioned above, the longer you own your car, the more savings you experience over the long term. With today’s more advanced technology and general build quality, you have every reason to believe the car should last at least 150k miles or more. With the average car on the road being 11 years old, you should easily be able to stretch your car out to 15 years, and thus be smarter than the average person. But, if you absolutely must have a new car every few years, then, by all means lease your ride rather than buying new. Why on earth would you want to take a huge “off the lot” depreciation hit every few years?
As in life, most good things must come to an end. After those glorious 10-15 years of low cost ownership, your used car may need to be replaced. When the repair bills begin to be greater than the car’s worth, it’s probably time to think about getting a “new” used ride. We wouldn’t want anyone stranded on the side of the road, now would we?