Should I buy or lease a car?
The automotive industry has faced numerous challenges in recent years, including the aftermath of the COVID-19 pandemic, geopolitical tensions such as Russia’s invasion of Ukraine, the growing popularity of electric vehicles, and fluctuating metal prices. As a result, financial planners are frequently asked by clients whether they should purchase a car through a loan or opt for a lease. In this article, we will explore the pros and cons of each option so you can make an informed decision.
Purchasing a Car
Purchasing a car is a straightforward process. You can either pay for it in full or take out a loan, which is typically for a term of three to five years. Approximately 80% of individuals who purchase a new car choose to buy instead of lease. If you pay for the car in cash, you will receive the title immediately, whereas those who take out a loan will receive the title after they have made their final loan payment. Owners have no mileage restrictions or restrictions on altering the car’s appearance. Additionally, if the car is used for business purposes, the owner may be eligible for a tax deduction. However, it’s important to keep in mind that new cars can depreciate as much as 20% in the first year and up to 40% after five years, so it’s not a long-term investment. Additionally, maintenance costs can be substantial, and when it comes time to get rid of the car, the owner will have to decide whether to sell it, trade it in for a new car, or keep it until it’s no longer operable.
Leasing a Car
Leasing a car involves different terms and conditions. When you opt for a lease, you agree to pay a dealership for the right to drive the vehicle for a set period, typically 24 or 36 months. People who choose to lease often want to drive a luxury car without having to make a large down payment or pay high monthly loan installments. Lessees are also subject to mileage restrictions, which can range from 10,000 to 15,000 miles per year. At the end of the lease, you have the option of returning the car to the dealership or purchasing it for an agreed-upon amount. However, it’s important to note that the dealership owns the car, so you do not have the opportunity to build equity. If you choose to end the lease early, you may have to pay a termination or cancellation fee, and the costs can be difficult to predict. In essence, leasing is like a long-term rental from a dealership, but you must provide your own insurance, and you may choose to purchase the car at the end of the lease instead of returning it.
Which option is best for you? As with many financial decisions, there is no one-size-fits-all answer. If you are not willing to pay high monthly costs, enjoy the latest technology, and don’t mind covering maintenance costs or finding a buyer when you are ready to sell the car, leasing may be the right choice for you. On the other hand, if you want full control over the car and are comfortable with the responsibilities that come with ownership, purchasing may be the better option. Most financial planners would recommend purchasing, but it’s always wise to consult a professional to determine which choice is best for you as part of your overall financial plan.
If you’re considering purchasing a car or leasing one, it can be helpful to have a professional financial planner guide you through the process. At Johnson Financial Advisors, we specialize in helping our clients make informed financial decisions and create a plan that works best for them. Whether you’re looking to purchase a car, make a major purchase, or plan for retirement, our team of experienced advisors is here to help. Contact us today to schedule a consultation and start building a brighter financial future.