Buy vs. Lease — Car?

April 27, 2021
By Kristan Anderson, CEBS®, CFP® | Dir. Of Retirement Plan Services & Dir. Of Financial Planning

Last summer, my daughter wanted her own car, to get to work and show rehearsals. But I didn’t feel like we needed to buy another car, specifically for someone who was going off to school soon. So, I was left with the task of figuring out how to provide transportation, without creating unnecessary long-term costs.

This led me to the question: When should you buy a car, versus lease? It’s complicated and, like a lot of financial decisions, depends on a number of circumstances.

In general, leasing makes sense if you don’t intend to keep your car for the long haul. For example, if you always have a car payment, then you might want to consider leasing, which generally means a lower monthly payment than a car loan of the same term. Another consideration is mileage — lower is generally better for leasing, although it is possible to add mileage to the initial lease agreement. In a recent analysis for a client, we determined that the client’s need for frequent, low mileage business-related trips in the car suggested that leasing might be a better alternative than buying, especially if it could be written off as a business expense. Finally, if you like ”brand new” in your transportation, then leasing is definitely for you. There is a financial downside to driving the latest model, though, and that is continuous payments, without actually buying anything.

Therefore, the argument in favor of buying is that, while the initial costs of ownership are higher, you have an asset at the end of the loan period (if financing). If you are able to obtain favorable financing, the total cost over the initial loan period might be even lower than the lease payments. But the bottom line is, eventually you pay off a loan and no longer have that expense. For people who maintain and care for their cars and replace them infrequently, buying is certainly a more economical option. In addition, insurance costs may be higher for leased cars, which weighs in favor of buying.

In our case, the third option we considered was purchasing a cheaper, used car outright, which is what we chose to do. We only needed additional transportation for a short period of time, and I didn’t want another car payment in any form. But even if you are looking for a longer term investment, buying a car almost always makes more financial sense. Feel free to reach out for a quick buy versus lease analysis based on your personal circumstances.

Meet Kristan Anderson, CEBS®, CFP® | Dir. Of Retirement Plan Services & Dir. Of Financial Planning »

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