Should You Lease or Buy a Car? 4 Key Questions to Ask Yourself

Financial Planning | Life Events

 Plancorp Team By: Plancorp Team
Showing off my husband's latest (leased) ride.

Fall marks the onset of the holiday season for many of us. But for car aficionados, ‘tis an entirely different type of season—it’s when new models hit dealerships.

Around this time of year, I typically get a number of questions from clients around buying vs. leasing a car. Which is cheaper in the long-run? Which is the better lifestyle fit?

Like many financial decisions, the better option is somewhat personal and circumstantial. That being said, here are four key questions to ask yourself.

How important is it that you …

 

1) Whip around in the latest model?

If you’re the type that wants a new car every two to three years, it may make more sense for you to lease.

2) Rack up a lot of miles?

Leasing tends to make more financial sense if you put under 10,000 – 12,000 miles on your car each year. Any more than that, and purchasing is likely your better option.

3) Avoid maintenance issues?

Newer cars bring the added perk of less maintenance. If you’re looking to drive something new and snazzy with minimal upkeep, leasing may be for you. However, it’s important to check with your specific car company to ensure service is included.

4) Have financing options?

You have fewer options when leasing a car than when purchasing. Even if you know you don’t want to buy outright in cash, taking out a loan on a new car may be more cost-effective for you than leasing, depending on the financing options for which you qualify.

Next Step: Financial Analysis

Once you determine how you feel about these factors, ask your financial advisor to run a more technical lease vs. purchase analysis for you. For him or her to do so, you’ll need to provide the following information:

Purchase Option

  • Purchase Price
  • Trade-In Value
  • Sales Tax / Registration Cost
    • If Buying with Cash: Annual Percent Depreciation (normal is 15 percent, if you don’t know)
    • If Financing: Loan Term and Interest Rate

Lease Option

  • Purchase Price
  • Trade-In Value (assuming you use this for the down payment on the lease)
  • Fees (usually at least a $595 origination fee)
  • Residual Percent of Car at End of Lease (again, normal would be 15 percent per year)
  • Lease Term (24 or 36 months)
  • Lease Payment

Note: You will likely hear something like $479/month, but that does not include your portion of the sales tax. Because you will pay the sales tax on a pro-rata basis over the life of the lease, be sure to ask for the complete lease payment (e.g., the complete lease payment for $479 would actually be $501).

I ran a similar analysis for my husband in 2014, prior to him deciding to lease a new car. He thought it would be fun to drive a pickup truck for a few years, but knew he would likely want to buy after that, so leasing made the most sense for him.

Once you’ve determined your priorities and run the numbers, you’ll have a good pulse check on whether leasing or buying is your better option. Then comes the fun part—ringing in the season with a visit to the dealership.

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