Should You Buy or Lease Your Next Car?
Since 2009 the trend has been clear: more and more people are leasing cars. Though, this trend has reversed since the pandemic began, as leasing standards have tightened and unemployment has increased, much as it did in the last recession.
Many people find leasing more befitting to their lifestyles. It's likely that people have never been subscribed to so many things at once. Streaming services, Prime, warehouse memberships, razors, food, software, credit card fees...the list goes on. This subscription/lease model is typically beneficial for the companies selling them, while in some circumstances satisfying the subscribers' preference of simplicity. But financially speaking, who wins? As with most things in life, the answer is not so straightforward.
It Starts With the Right Car
Before you consider the different aspects of purchasing versus leasing, try to make a well informed decision on which car will best suit your needs. This can include the practical aspects of whether there is enough room to store your family and all of their luggage on family trips or if the car is the right height to be able to travel with your aging parents. There is also safety to think about. Are features such as lane departure warnings and automatic braking when you approach a car too closely standard or will they cost extra?
How about gas mileage? There is as much difference in gas mileage between different cars as there has ever been. Even between the same class of car, the way an engine is built can significantly alter mileage performance. To calculate what this adds up to, take the average of city/highway mileage per gallon for each car you are considering and divide it by the number of miles you expect to drive each year. This will give you the number of gallons you will consume each year. Multiply that by the gas rate at your local gas station for each car and not the difference in gas spending.
Above are some of the practical considerations when buying a car. Also important is how you feel driving and owning the car. Whether you are purchasing or leasing this car, it will be with you for a number of years, so make sure to take time to purchase the car that makes you happiest in your price range.
Time Value of Money
The breakdown of how consumers purchase cars in the U.S. is above. 21% lease, 36% outright purchase and 43% finance their purchase. Leasing and financing typically require around $2,000-$5,000 as a down payment. The main advantage of either of these purchase methods versus outright purchase is that you get to hold on to your money for longer. The more expensive the car, the more significant this effect is. Let's look at two different cars to illustrate this point.
You can see from the examples above that financing a purchase is typically the least expensive option of the three. The more expensive the car, the larger the difference is likely to be in cost between financing, purchasing outright and leasing. Of course, what I cannot take into account here are individual offers that car companies are offering at any given time. You can see from the illustrations that the difference in options can be thousands of dollars. For this reason, bringing this purchase decision to your financial planner for analysis could be worthwhile.