There are a few issues out there that get people really involved with a position. And anyone who knows what they are is aware that once the given topic comes up, there are two choices: get involved or stay out of the fray. Buying versus leasing a car usually gets people to voice an opinion as well -- and very strong ones at that. However, there is no clear right answer. That’s because everybody’s situation is different, and unique nuances oftentimes makes one situation better than the other for a given person’s needs.
Those who lease will argue that buying a car involves higher upfront and monthly costs, and that if you plan to get a new car every few years anyways, it just makes sense to lease instead. Those who prefer to buy will argue that when you buy you get to own a tangible asset in the end, and that leasing gets you into a cycle where you never stop paying for a vehicle.
The idea of leasing a car might be advantageous for people who need to have a newer car on a regular basis. Salespeople, corporate and fleet managers and others with similar positions often tend to prefer vehicles no more than three to five years old. The focus on a new vehicle keeps up an image for social needs, avoids major repair costs, and reduces the need for a full cost outlay on purchasing a vehicle.
The hitch with leasing to remember is that the car is typically more for local driving than hard usage. Many leases have limitations on mileage (12,000 to 15,000 per year is typical)1 and steep penalties if you exceed your limit. On the other hand, if you are the type of person that plans to be in a new car every few years anyway and you don't need the car as an asset, leasing might be a good way to go.
Investment in a vehicle for ownership is one of the top three big purchases a person will make in life. Unfortunately, however, many enter into car buying out of necessity. That frequently leads to being stuck with a car that isn't what the person really needs or wants at the time. Buying a car is most beneficial when a person wants to 1) have complete control of the vehicle, 2) get maximum value out of it, and 3) properly maintain it. If all three factors are a "yes," then a car investment might make sense.
Nobody should enter into a car purchase with the idea that somehow the resale value will recapture most of what is spent in a few years. That's a full-blown myth. Due to the markup involved, most cars lose a third of their value as soon as they are driven off the lot. Instead, car buying could be ideal for those who expect to own and use the vehicle for a very long time (well past the term of the car loan). As such, it's important to focus on picking a car with a high reliability record and performance history to maximize long-term value.
Since some cars tend to lose so much of their value so soon, another thing you might consider is purchasing a certified pre-owned vehicle. This might allow you to purchase a vehicle for a much cheaper price, low mileage, and still have several years left on the manufacturer’s warranty. And with some luck it might still look the same as a current year model, so nobody will know the difference.
1Consumer Reports, 2017
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Luis Rosa CFP® EA is the founder of Build a Better Financial Future, LLC. He has been in the financial services industry since he graduated college in 2001. Luis focuses on empowering people with planning tools and action steps to help position themselves for a better financial future.
Luis has been quoted in articles published in Yahoo! Finance, U.S. News & World Report, NBC News, Investopedia, Business Insider, The Daily News, and several other online publications. In addition to obtaining his securities registrations Series 6, 7, 63, and 66, Luis is also a CERTIFIED FINANCIAL PLANNER™ professional and is enrolled to practice before the IRS. This diverse financial knowledge allows him to best serve his clients by understanding how one financial decision affects the other, allowing him to better guide them toward pursuing their goals. To meet and see how Luis may be able to help, contact Luis directly at Luis@buildabetterfinancialfuture.com.
Investment Advisor Representative of Retirement Wealth Advisors Inc. (RWA), 89 Ionia NW, Suite 600, Grand Rapids, MI 49503 (800) 903-2562. Investment Advisory Services are offered through RWA. Build a Better Financial Future and RWA are not affiliated.
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