Should You Lease or Buy Your Next Car?
A question that tends to be on a lot of peoples minds, should I buy or lease a car?
I recently went through this process and landed on leasing a new Lexus.
Let’s explore the pro’s and con’s for leasing a car:
Pro’s:
Typically, if you lease a car, you can drive a nicer more modern vehicle than you might otherwise be able to afford.
As you are driving a newer vehicle, you are usually covered by the manufacturer’s new-car warranty and (hopefully) deal with fewer unforeseen expenses…
Your monthly lease payment will be lower compared to buying a car outright. However, that monthly savings has diminished significantly over the years as the monthly payment for a lease is close to buying it outright. I did put money down to help lower the monthly payment. But be mindful of putting down too much money when you lease. In the event that something happens, and the car is totaled, you will not be getting that money back.
At the end of the lease, you have the option to buy the vehicle for the agreed upon residual value, get a new lease, or call it a day.
Con’s:
Over the long-term, leasing is more expensive than buying a car outright. Leasing one car after another, your monthly payments never stop. But if you buy a car outright, the longer you keep the car after the loan is paid off, the more value you get out of it.
Under a lease, you are limited to the number of miles you can drive over the lease term. If you go over that limit, you’ll have to pay an excess mileage penalty. That can range from 10 cents to as much as 50 cents for every additional mile. You don’t get a credit for unused miles.
If you lease, ensure you are keeping the car in good condition. I ended up purchasing excess wear and tear insurance to give me coverage for any damage to the car while it’s in my possession for a minimal cost.
Chances are you’re still on the hook for expendable items such as tires, which can be more expensive to replace on a newer vehicle. Some dealerships do offer deals that you should consider.
How did I prepare for this financially?
I knew a car purchase was in my future but I didn’t know if I was going to buy or lease. So how did I prepare for this financially? I allocated a substantial amount of money into my high-yield savings account via systematic savings and any lump sums when it was available. That way, once the opportunity presented itself, I could move quickly. And while I wasn’t using those funds, I was getting paid to wait…
Also, I’ve been saving into my investment account on top of the high yield savings. I considered this as ‘dry powder’ in case I needed more money for the purchase or to replace the proceeds I took from my high yield savings account.
In any event, I was prepared and knew where I would take the money well before I went to the dealership.
Other thoughts:
I don’t consider myself a car guy. I was sharing a 2010 Honda Accord with my brother that had 3 1/2 hub caps, consistently leaked oil, and made noises that cars shouldn’t make…
Frankly it was time.
But the process was stressful. I had to decide what I ultimately wanted, and we are still dealing with limited inventory.
Oh by the way, cars are EXPENSIVE!
According to Edmonds, “15.7% of consumers who financed a new vehicle in Q4 2022 committed to a monthly payment of $1,000 or more — the highest it's ever been.”
That does concern me as I’m not a huge proponent of buying the nicest cars and trying to impress people.
Remember this Morgan Housel story about the ‘Man In Car Paradox’?
Then I thought about lifestyle creep. When you see your income go up, your expenses follow in lock step, which is not a sustainable way to build wealth.
But I ultimately said, Fuck It.
If you work your ass off and are doing the right things, don’t be afraid to reward yourself and splurge sometimes.
The spreadsheet told me to buy a new Honda Accord, but I’m not a spreadsheet…
Stop settling in life, you deserve more.
The issue is when people view this as a trade-off: buy the new car or continue to save.
But it shouldn’t be one or the other. You should be able to afford the car while ALSO continuing to save your money.
I’m also wired differently. When my back is against the wall, as these new car payments will be a shock to my system, that is when I perform.
At some point I will buy a car, but this wasn’t the right time for me, and that’s ok.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.