Getting a New Car?
Let’s be honest, the process of getting a new vehicle is daunting. You know that the entire day will be spent in the dealership, you will be on constant alert for underhanded practices, and you never leave feeling like you got a good deal. Many times, even the most shrewd buyers who have already done days or weeks of research prior to arriving at the dealership with a specific car in mind, will end up leaving with an entirely different vehicle, at an entirely different price.
What can make this already exhausting process even worse is when you are met with the decision to buy outright, finance, or lease.
When first looking at these three options, one thing commonly stands out right away: those low lease payments. Let’s use an example. Say you are looking at a new Honda CR-V with a sticker price of $31,000. Assuming the average credit score of 711, your payments on a four year finance with a 10% down payment could be approximately $521 per month (4.34% APR), while a four year lease with an identical down payment could be as little as $349 per month. This disparity in payment amounts is enough to convince many people that leasing is a better option for their monthly budget. It may even convince them that they can afford a more expensive car with a lease payment near the cost of financing the original CR-V.
The lease can become even more attractive when the salesman tells you that at the end of your lease you have the option of buying the car outright, or rolling over the lease into a brand new model. Some dealerships will offer other incentives such as fixing any mechanical problems that arise at zero cost to you since the car is still under warranty.
While leasing can sound like a great option at first, there are many drawbacks that need to be considered. First, when you lease a car, you will sign a mileage agreement stating that you will limit the yearly mileage on the car to a set number, such as 10,000 miles. If you exceed this limit, you will pay a set fee for every mile you go over, and you can expect a significantly higher monthly payment if you want to increase your mileage limit. Also, at the end of the lease you will have other fees such as excessive wear and tear and a disposition fee. Excessive wear-and-tear will be defined by the lease agreement, but can be expected for the dealership to charge you for any scratches, dings, dents, or cracks that occur while you are under contract. A disposition fee is the amount of money that the dealership feels is necessary for them to clean up the car in order to sell it to a new owner.
Some additional concerns could be that if you lease, it is likely that you will be required to purchase maximum coverage auto insurance, and possibly even gap insurance since the dealership wants to protect their car that you are essentially renting. Additionally, if during your lease you decide you no longer want to drive the car, you will have to pay a fee in order to break your lease. On top of these concerns, you will also have a monthly payment for as long as you continue to lease.
When you lease it may seem like you are avoiding the depreciation associated with buying a car, but the dealerships have this figured out. Dealers understand that when you drive their car off the lot, it loses value. They are in the business of selling cars for profit, so they are going to factor this depreciation into your payments. They have a relatively good idea of what this depreciation will be since you are only allowed to drive the car a certain amount of miles per your contract.
The pros and cons of both financing a car or buying it outright are more apparent than leasing. The most significant benefit In both cases is that you have a vehicle that you own, which gives you options. Once you have fully paid for the vehicle with either a lump sum or through reaching the end of your financing contract, your only expenses will be the usual gas, licensing, and maintenance costs associated with ownership. You can also choose at any time to sell the car, putting money back in your pocket and reducing the total cost of ownership. If you own the car you can also choose to give it to your child or grandchild when they reach driving age, or you could donate it to your favorite charity. Ownership gives you options that leasing will not.
Some of the downsides to buying are that the car will likely depreciate in value the minute you drive it off the lot, and continue to lose value as you use it and time passes. You are responsible for the maintenance costs while you own the vehicle, which can potentially be a non-issue or a constant problem depending on the car you buy. A less obvious downside to buying is that you will likely be responsible for the sale of the car at some point, which can be stressful.
When you finance a car, you are going to have monthly payments that are usually higher than leasing and you will be paying a set rate of interest. The longer you take to pay off the car, the more you will spend in the long run since interest is going to continue to add to the debt. The advantage that financing has over leasing is that you are building equity in the car as you make payments. While the car is a depreciating asset, it will still carry some level of value, and you have the option of tapping into that value by selling the car. Also, once you have paid off the car, you will have completely removed a car payment from your budget for as long as you choose to drive that car.
The benefits of buying a car outright with cash rather than financing are that you will avoid the addition of interest to the total cost of the car and you will not have a monthly car payment to budget for. This is the cheapest way of owning a vehicle, but there are some considerations that need to be made, such as the cost of the car, your income, and your savings. While it may be the most cost effective way to own the vehicle, it requires all of the cost to be paid up front, which may be a bigger hit to your savings than you can afford, it all comes down to your personal situation.
Let’s face it- no matter how you look at this, getting yourself a new car will likely cause some stress. It is among the larger expenses in a typical life, and as a result, it should not be taken lightly. But knowledge is power. So take comfort that with this information, and a bit of your own research, you will be better prepared for the next time you need to make the trip to the car dealership.