NEWS AND RESOURCES

Financial Planning for November 2007

New Vehicle - Should You Buy or Lease?
Are you in the market for a new vehicle? If so, you know there are many considerations when making such a substantial purchase, not the least of which is how you will finance the acquisition. Included in that decision is whether you will buy or lease your new car, but what is the best route?

Had I been asked the question of whether to buy or lease 10 or 15 years ago, I would assuredly have advised you to buy. At that time, lease rates were very high compared to financing an outright purchase. Since most leases required you to pay for mileage in excess of a contracted amount and guarantee the resale value of the car, leasing a vehicle was just very expensive.

Today, the difference in cost between leasing and buying a vehicle has narrowed, although from a ‘purely numbers’ standpoint, buying a car and keeping it past the last payment is generally more cost effective, unless you have a vehicle that turns into a veritable ‘money pit’ after the warranty runs out.

So why are nearly half of luxury vehicles still leased rather than purchased outright? It’s pretty simple. When you purchase a Lexus, Cadillac or other luxury car, the payment you make is based on the expectation that you will pay the full purchase price. When you lease the same vehicle, your payments are lower because you are paying only for the portion of the purchase price you are expected to use.

For example, the Acura TSX has one of the highest resale values after five years according to Kelly Blue Book. When you buy the car, you will probably pay in the neighborhood of $29,000 for the vehicle and another $3,000 to $5,000 in tax, title and license fees. Assuming the entire amount you finance is around $32,000, your monthly payment will be approximately $635 for 5 years.

Let’s say you lease the car for 36 months instead. Assuming you are limited to 15,000 miles per year, the lease payment will be approximately $581 per month. You get the same car for $54 less per month. As noted earlier, this is because the lessor expects to be able to sell the TSX for a minimum of $16,000 at the end of the lease term. Essentially, you are financing about $14,000 over three years versus $32,000 over five.

Even a casual look at the numbers tells you it is wiser to buy a car than lease it if you plan on keeping the vehicle. Many people, however, prefer to lease new vehicles every few years because:
  1. They are always driving a fairly new vehicle and,

  2. That vehicle is usually under warranty, so maintenance costs will likely be far less than continuing to maintain an older vehicle.
It is generally easier to dispose of a leased vehicle than an owned one. The lease vehicle is simply returned to its owner and a reasonable fair market value is received in return because of the way the lease payment was originally calculated. It is more difficult to obtain full value for an owned vehicle. While disposal through trade-in may be relatively easy, the trade-in value of the car will be far less than its true value. If you choose to sell the vehicle, you will go through some headaches in advertising the car for sale and transferring title when the time comes.

Don’t underestimate the psychological factor in deciding which way to go. Some of us just abhor the thought of driving a vehicle that technically belongs to someone else. The truth is that owning a car is part of the American dream and we somehow feel cheated knowing that we are really just renting the car for a short time. On the other hand, some of us have no problem driving someone else’s property. Yes, we are paying for the privilege, but a leased vehicle is technically owned by someone else.

What’s the bottom line for you when acquiring new transportation? As we have discussed, you have several things to think about. In the end, though, as long as you don’t overextend yourself - and you are happy with your choice - the difference in economics probably isn’t enough to cost you much sleep. I do suggest, however, that before you sign on the dotted line, you run the numbers by your CPA or financial adviser. If you don’t have one, please let my firm assist you in making this important financial decision.

Happy Thanksgiving.

Disclaimer 
 
 

Contact Us for More Information

OUR KNOWLEDGE IS YOUR ASSET

Copyright (c) 2003.Tidewater Accounting and Business Services. All rights reserved.