Looking for a new car? Review your financial options first.
Sooner or later, most people will need to get a vehicle. And unless you have a genie in a bottle or some other way of wishing a car into your driveway, you’ll need to shell out some money to pay for your new wheels.
But should you buy or lease your vehicle? Each option has its pros and cons, and it’s important to review the alternatives and understand them in the context of your savings goals. The first step is to understand the pros and cons of buying vs. leasing.
According to Edmunds.com, an online resource for automobile information, the pros of leasing include smaller monthly payments and little or even no down payment. Generally, drivers can get a nicer car for less money, too.
“If you need an upscale car for business, perhaps to entertain clients, leasing allows you to drive a luxury vehicle for less money. It might also provide a good tax write-off,” Edmunds said.
New autos generally have a factory warranty, which can keep repair costs low. If you like to have a new car every two or three years, it’s easy to transition. Trade-in hassles are eliminated and sales tax is less, Edmunds said.
The downside is that when the lease term is up, you don’t own the car, although you generally have the option of buying the vehicle. People who drive more than a maximum amount specified in the lease, such as 12,000 miles a year, may need to purchase extra mileage, and excessive wear-and-tear charges can be expensive when the lease is up. Contracts can be confusing, and it’s expensive to terminate the lease early. It also costs more in the long run to lease a vehicle than to buy it outright, according to Edmunds.
Buying a car is fairly straightforward. A driver borrows money from a lender, makes monthly payments until the loan is paid off, and the buyer gains equity in the vehicle.
“If you don't need the status of a new car and prefer to keep automotive costs as low as possible, the best choice would be to buy an affordably priced new or used car and keep it for as long as it is reliable,” Edmunds.com said.
One drawback to buying, according to Consumer Reports, is a higher monthly payment, since the driver is paying back the vehicle’s entire cost, less trade-in or down payments. With a lease, you are essentially just financing the vehicle’s depreciation. Also, owners must sell or trade in their old cars when they’re ready to buy new.
Drivers have a few options when it comes to auto loans, explained LendingTree.com. Loans are either secured or unsecured. In a secured car loan, a lender puts a lien on an asset the borrower owns in case of repossession, while with an unsecured loan there are no assets tied to the car, so interest rates may be higher.
There are two types of loan payments: precomputed interest loans, which have a set payment schedule and don’t allow prepayment, and simple interest loans, where interest is calculated on a preset periodic basis and loans can be paid off early.
Of course, there is another alternative when buying—a cash purchase. If you have enough cash to make the purchase outright, you may decide not to finance. But draining your cash reserves can have drawbacks as well. Some people would rather keep cash outlays to a minimum in order to keep more money invested, even if it means financing a car purchase. Plus, many experts recommend keeping an emergency fund, and to avoid excess cash outlays such that you become “cash poor.”
Whether you take out a loan or lease a car, it might come down to your taste and financial priorities.
Overwhelmed with the idea of creating a plan on your own, or feel you need additional input?
Debbie Carlson is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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