You need a new car. Maybe your old one was totaled in an accident or is becoming too expensive and unreliable. Or perhaps it’s time to treat yourself to a new car.
What’s the best way to put a new ride in your garage, driveway, or in front of your home? Buy? Lease? Save up and pay cash?
With interest rates rising and many desirable vehicles difficult to find because of supply chain shortages, a lot of the conventional thinking for car buyers has changed. Here’s how to decide the best way to buy your next vehicle.
Three myths persist among car buyers. One was once true (but hasn’t been for the last couple of years), and the other two were never valid.
Some buyers insist that the fact they have the cash to purchase a vehicle right now puts them in a stronger bargaining position. But, interestingly, the opposite is true.
Dealers actually make a better profit when a buyer finances a new vehicle than if they bought it outright.
What to do: Avoid discussing financing (or how you intend to pay for the vehicle) until you finalize the deal. And under no circumstances tell a salesperson your desired monthly payment. If you do, you’re likely to receive a quote that is suspiciously similar to your stated allowance.
The best deals used to come at the end of a month, quarter, or model year. That’s because dealers were working to meet quotas and earn bonuses or clear out older stock.
What to do: Don’t rush or feel pressured to make a decision. Today, supply chain issues and computer chip shortages have constrained supply to the point that the few deals available generally aren’t linked to mining.
Despite the fact that it’s never been true, too many buyers still believe that they only have three days to cancel their purchase. This is a big myth and nothing more than a sales tactic designed to rush buyers into making snap decisions. A signed sales contract is legally binding as long as the dealership fulfills its obligations to the buyer. The three-day myth stems from a Federal Trade Commission rule that provides a “cooling off period” for purchases made at home from someone selling door-to-door.
What to do: Make sure you are 100% comfortable before signing on the dotted line. Buying (or leasing) a car is a big decision, and there are no “backsies” after you’ve committed.
While the myths about buying vs. leasing a vehicle aren’t as widespread, it’s important to understand how the two differ and which option may be best for you.
First, understand that leasing is really another word for renting. Just as you might rent a vehicle for a week on vacation, with a lease, you’re renting a car for one-to-several years. When the lease period ends, you turn in the vehicle and walk away. At this time, you may have to pay a fee. You may also have the option to purchase the vehicle at a price determined when the lease began. When the lease ends, you can buy the car, lease or purchase a different vehicle, or live without one.
When you buy a vehicle, once you’ve finished paying for it, it’s yours. You can continue driving it, sell it, or trade it in to help purchase another one.
Advantages of Leasing
Disadvantages of Leasing
Advantages of Buying a Car
Disadvantages of Buying a Car
Both auto loans and lease payments will have the same effect on your credit score, so that part of the decision-making is a wash. On-time payments will boost your credit score in both cases, and both types of payments will affect how much credit you’re using (and how much you can borrow for other purposes).
Manufacturers often offer incentives, such as rebates and special rates, that can significantly change the cost of buying or leasing a vehicle. To find the true value of your car, you need to find the Total Cost of Ownership or TCO. Edmunds.com has a handy calculator you can use to find this number.
Make sure it’s an apples-to-apples comparison by matching the terms: if your vehicle loan is, say, six years, you might want to calculate the cost of two three-year leases. (Longer term leases are available, but three years is most common.)
If the lease or purchase includes free maintenance, include that value in your calculations.
If you’re considering different vehicles (a lease for Vehicle A or a purchase of Vehicle B), research whether insurance, maintenance, or driving costs will differ significantly.
Finally, one more calculation: if the down payment or monthly payments between the two options differ significantly, think about what you’d do with the “extra” money if you chose the cheaper alternative. For example, an extra $200/month in your retirement account could make a big difference down the road.
Keep in mind that both purchases and leases may be negotiable. Lease payments, for example, may be based on the vehicle’s manufacturer’s suggested retail price (MSRP). If the dealer is willing to negotiate the price of the vehicle if you’re buying it, the starting price for lease calculations may also be negotiable.
Above all, do your research and the math. Then decide whether buying or leasing a specific vehicle is best for you.
Facet Wealth, Inc. is an SEC registered investment adviser headquartered in Baltimore, Maryland. This is not an offer to sell securities or the solicitation of an offer to purchase securities. This is not investment, financial, legal or tax advice. Past performance is not a guarantee of future performance. Facet is not responsible for the content or availability of any linked third party website. The security and privacy policies of third-party websites may differ from those of Facet.
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Facet Wealth, Inc. (“Facet”) is an SEC registered investment adviser headquartered in Baltimore, Maryland. This is not an offer to sell securities or the solicitation of an offer to purchase securities. This is not investment, financial, legal, or tax advice. Past performance is not a guarantee of future performance.
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