If you live in an area where public transportation is not readily available, you will eventually need to consider getting a vehicle to get you from point A to point B. As you enter your young adult life this may be one of the largest and scariest decisions you have had to make up to this point.
You may already have a car that your parents bought for you or helped you get when you were younger and it is now time for an upgrade. Your current vehicle could be out of warranty or may no longer be reliable. Or, you could have experienced some life changes that have brought on the need for something different: a new baby or new job with a longer commute.
The question is: should you lease a new vehicle or purchase one?
The answer to that is, it depends!
Let’s just get this out of the way now - I LOVE CARS!!! I love everything about cars. I love cars that go fast, I love nice cars, and I have had my fair share of cars.
I was very lucky to have my first car purchased for me by my parents. They bought it for me with the understanding that I would drive my sisters around in it. I didn’t really care about the motive behind their purchase--I was simply grateful to have a car. In my mind, I had visions of my dream car but that didn’t happen because I didn’t make the grades. I almost got the good old family station wagon, but my parents wanted something a little more fuel efficient so they bought me a Jeep. The main goal was that I would drive more so my mom could drive less. These days parents are calling an Uber for their kids.
When I got my second car I was living at home and only 10 minutes from my office, but no one walked anywhere. I had no option but to lease it because I couldn’t afford the monthly payment for the car I wanted, and I was set on getting what I wanted this time - an Audi A4. While in theory this was the perfect car for me, a cross-country move a year later made this not so.
I ended up moving to New York and took the A4 with me. I had no choice--I was locked into the lease. What a mess! Did I mention the A4 was a convertible? Not so perfect for New York weather but I had no way out of my lease. Once I got to New York I realized just how impractical my dream car really was. I did discover Swap-a-Lease, a program that allows people to swap in and out of leases. This is a great option for someone to pick up a car on short-term lease, get one off of a lease, and get a good buyout option or residual purchase price. So that’s what I did.
My third car was an Audi A4, again. Remember that whole disclaimer that I love cars, sports cars, fast cars? Yep, another A4. I had moved from New York to California and this time I purchased a certified pre-owned car. This was the BEST CAR EVER! I would have kept this car forever, but life changed once again and therefore it was time for another change in vehicles.
Two years after I purchased the second A4 I was living a different lifestyle in California. I had two dogs that went everywhere with me. I loved to be outdoors and went snowboarding a lot. I was also pregnant and it was time to get something bigger to accommodate our growing family. I ended up upgrading to an SUV. While it was gold - my husband hated that gold color - I did love my new SUV and it fit perfectly with the life I was living.
My fifth car was a leased Dodge Durango seven seater. We decided to lease this one so that we could keep our payment down and still get something that would fit our two kids and au pair. My husband really liked this SUV. I didn’t mind it. It was black (not gold), it was fast, and it had towing capabilities. It was also a third car for our family, so I didn’t drive it every day.
Doing it Right
I have had some cars that I love and some that were okay. Some were great experiences, and some were not. There are a lot of questions you need to ask yourself when getting a new car that can help you avoid a few of my mistakes.
Think about what you want vs what you need.
You have to be practical. We all have a “dream car,” but you have to consider if t is really the right time in your life for that dream to come true. Think about your daily uses. For example, how far is your commute to and from work? It is also a good idea to consider occasional uses that are a part of your life, like do you like to travel? These things matter too. If you like to travel and haul a bunch of stuff around you need cargo space, so something with a very small trunk may not be the right choice.
Think it through. There are little things that make a big difference: are you are a pet owner, do you have a family, what is the climate where you live? These may seem like little inconveniences, but if it is something that bothers you, having to deal with it every day will get old and may cause you to regret your vehicle choice quickly.
Don’t forget to look a few years down the road. Is there a life event that will change your needs in the foreseeable future? Are you getting married soon, planning on starting a family, thinking about moving? While it is important to know that the car you choose will fit your needs now, you don’t want something to change that will make your new vehicle not fit your lifestyle.
Think about what you can afford.
Knowing you can afford the payment each month is important, but it is not the only consideration. Do your research and realize that different makes and models come with different levels of expense. Fuel efficiency and the cost of fuel is usually the primary thing people think about. Have you looked at insurance rates for the car you are considering? Some cars are higher than others to insure. Some cars come with varying levels of maintenance costs. An older car might need more maintenance. A foreign car might cost more to have work done on. A little research upfront may save you from a big surprise once you get your new car home.
There is also a different monthly expense if you decided to lease your new vehicle or purchase it.
Buying as an Option
If you are thinking about buying your new vehicle you are probably thinking about having to have a down payment. Some financing requires that it can only cover a percentage of the book value, so you will have to make up the difference if there is any. You may be thinking about trading in your current car as the down payment. Just be sure to know what your car is worth before you get into negotiations. After all, it is the salesman’s job to sell you a car but he also has to make sure the dealership makes money too. If you don’t feel that they are being fair with their trade in offer don’t forget that selling your current car in a private sale is also a possibility. It comes with its own set of headaches but it may be worth it to make the extra cash to put towards your new purchase.
The Pros of Purchasing
No monthly payments after the loan is paid in full
No mileage restrictions
No customization or excess wear fees
Don’t need excellent credit (but with a lower credit score comes higher interest rates)
The Cons of Purchasing
More expensive (in the short run)
Beware of long-term loans (interest over time can cause total amount of the loan to rise)
May need a down payment
Leasing as an Option
Leasing is an option that many people consider, but you have to know the ins and outs to know if it is right for you. Some people only want to keep a car for a few years so they don’t want the long-term commitment of buying a car. Some people choose to lease a car because their monthly payments would be lower. When you lease a car you are only paying for the depreciation of the car during the years that you will have it rather than the cost of the whole vehicle. There is a catch - the car is not yours--you are borrowing it. There are restrictions on how many miles you can put on the car and you can be charged additional fees if you do more damage than the normal wear and tear. You just need to weigh all of the pros and cons to know if leasing is right for you.
The Pros of Leasing
Small down payment
Pay less each month
Option to trade up every few years
Latest in advance safety and technology
Potential tax savings (depending on location)
No need to worry about selling your trade-in
Remains covered under warranty
The Cons of Leasing
Excess wear fees
Ride-sharing restrictions (most leases will not allow you to work for Uber or Lyft types of companies)
No equity - you will never own it
Need excellent credit
GAP insurance is required on leased vehicles
The long and the short of it is choosing whether to buy or lease a vehicle is dependent on your unique situation and lifestyle. There isn’t always one decisive answer. You need to take all things into consideration and do your research. Be sure to know what type of car will meet your needs now and for the next few years (at least). Always answer your why. Why are you buying this particular car? Do you just love cars? Do you need something that will just get you where you need to go? Those two questions are answered two totally different ways.
My final words of advice: don’t underestimate how much life changes in your 20’s and 30’s. Be prepared and make an informed decision. Sometimes having a neutral third-party can be helpful in figuring out this process. Please feel free to reach out and call GW Financial, Inc. and see how we can help you.
Julie Bray, CFP® is the President and a Client Wealth Manager at GW Financial, Inc (GWF) in Orange County and Palm Desert, California. GWF is an independent, fee-only wealth management and financial planning firm specializing in advising and engaging individuals, families, and organizations. They focus on coaching clients toward financial peace of mind through financial education, clear communication, and smart resolutions.