Buying a car vs leasing is a challenging question. Making the wrong decision could cost you thousands of dollars and years of financial stress. Don’t let the stress of this decision ruin the process of buying a car! It’s certainly an exciting time, and who doesn’t love leaving the dealership in a shiny, fresh car? It just feels damn good!
The new car small, the new car look… even if it’s a used car, it still smells different, right? The feeling of joy and euphoria quickly fades into “oh, no…” once you realize you just made a massive purchase, and it has already lost 30% of it’s value…
When the time comes to update your vehicle the question to ask is… buy a car or lease? Which is the right answer?
Knowing that almost everyone needs a vehicle, what you absolutely need to consider is which method makes the most financial sense? Should you buy or lease?
It’s a big question that carries a massive financial burden, and it should be extensively considered before walking into a dealership.
What Is Leasing A Car?
Before you can answer the question of buying a car vs leasing, you need to understand what the options really mean.
You’ve probably heard someone talk about their car lease, but do you know what they’re talking about? If not, that’s ok. I really didn’t understand this concept for a long time.
For starters, leasing a car is not the same as financing a car. Financing a car leads to ownership once the terms of the financial contract have been complete.
If you’re buying a vehicle (even financing it), you can expect to pay the full agreed upon price. The first, and probably most important difference between buying vs leasing a car starts here.
If you lease a vehicle, you’re paying for the depreciated value plus interest and fees during the agreed upon time period.
So if you lease a $20,000 car, and the expected depreciation over three years is $7,500… that’s what you’re going to pay (plus interest and fees).
You won’t own the vehicle once your lease expires, you’ll simple return your vehicle to the dealership. Think of it like a very long term rent option.
After you return the car, you may have some lease end costs. This will most likely depend on how much of a security deposit you put down when you signed the lease initially.
At this point, you either lease another car, finance a car, buy a car outright, or literally walk away. You’ve gained nothing, and technically lost $7,500 plus fees and interest.
If you’re still trying to answer the question of buying vs leasing a car… This might not sound like the best option for you.
Hidden Costs Of Leasing A Car
If you thought leasing a car was as simple as picking out a new car and signing some paperwork, you’re wrong. There are potentially some huge financial landmines buried in your leasing contract.
The sticker lease price on that seductive new car might not be completely accurate, and you may end up with some pretty massive bills if you’re not aware of the additional fees that follow leasing a car.
Do you know how many miles you drove last year? Not just a roundabout figure, but the exact amount down to the mile?
If not, you absolutely need to know how much you’re going to be driving once you sign that lease agreement.
Almost all lease agreements have a mileage limit built into the leasing contract. If you exceed the limit, you’ll be diminishing the potential resale value of the car and most likely will get smacked with a penalty per mile. This penalty can be up to $0.50 per mile!
As you can probably assume, it can easily amount to thousands of dollars when it comes time to turn that vehicle in! Imagine not being prepared for that financial kick in the teeth…
Excessive Damage Fees
Do you live on a busy street, have a pet, or smoke? If so, these can become “excessive wear and tear” and end up costing you in additional penalties when you bring your car in.
The simple act of taking Ol’ Fido for a spin can end up costing you money when your lease expires. Be sure to understand what your dealership considers “normal wear and tear”.
Not having a clear picture of this can cost you thousands of dollars just to repair those coffee stains…
This is a tax that’s based on the current vehicle’s value, but it’s specific to the area you’re leasing your new whip.
There isn’t really anyway to avoid this tax, but you can spend some time researching the different excise taxes in your local markets. Maybe the town down the road has a less punishing tax?
It saves you some money, but again… it’s another fee assigned to leasing your car. (shrug)
Seriously? More fees? Yep… We’ve got a few more to cover. You’ll have your registration fee and your acquisition fee.
Every state requires that all vehicles are registered and titled. Once registered, you’ll get a plate and fill out the title paperwork and pay your registration fees.
The registration fee isn’t typically included in the leased price of the car, but it must be completed with your local DMV.
If you’re not sure how much this costs in your state… This page will tell you!
The acquisition fee may be referred to as the administrative fee, or bank fee. This is a charge for just setting up your lease.
The fee can range from $400 to $900 depending on the car and the leasing company. This can be rolled into your monthly payments if you wish, or just paid out of pocket when you’re signing your paperwork.
Pros vs Cons Of Leasing
- Lower upfront and total costs
- You may end up with a “nicer” car than you could typically afford
- You drive the car during the most hassle-free years of it’s life
- You have the ability to always drive a newer car
- You literally own NOTHING
- You’ll always have monthly car payments
- Tracking and worrying about your mileage
- Worrying about excessive wear and tear (which may be a subjective dealer decision)
- Inability to make any customization’s
- Hidden fees and charges
- Long-term financial loss/burden
Could Buying Be The Right Move?
Wait… Are you saying if I give you my money, that I’ll actually own the car? (mind blown)
Well, sign me up!!
The biggest and most important difference between buying a car and leasing is the fact that you’ll actually own something when it’s all said and done.
Buying a car requires more planning, and cash on hand, but it’s not only possible… it can be easily achieved with enough foresight and discipline.
Plan To Buy A Car
An important fact to consider is that a car is a tool. Not only is it a tool, it’s a liability and rarely an asset. Some will argue that anything that helps you make money is an asset, and you need a car to get to work.
So, ipso facto it’s an asset! Wrong (Donald Trump voice).
An asset appreciates in value and cars simply do not do that. The rate of depreciation depends on the car, but you can assume you’ll be losing 20% of the car’s value in the first year and about 10-15% each year after that.
If the S&P 500 offered those kinds of returns, the world would burn.
Knowing that your car will not be worth much in a few years, it’s best to be realistic with your wants. Don’t get me wrong, I’d love a decked out Ford Raptor. Those are some sexy trucks, but I can’t make peace with throwing away $70,000!!
How Much Should You Spend?
This is again a very personal decision to make, but a good rule of thumb is to not spend more than 10-15% of your income on a car.
I would take it a step further and say, don’t spend more than 15% of your take home pay, not your gross income!
Will you end up with a brand new car? Maybe if you make the kind of money to warrant that purchase, but most likely not. And that’s ok!
Keeping up with the Joneses is a disaster and will prevent you from achieving debt freedom and financial freedom!
If your household brings in $70,000 a year, you should be looking at cars in the $7,000 – $10,500 range, and don’t forget about fees and taxes like we talked about earlier!
Believe it or not, that price range can buy you a lot of car!
How Long Do You Have To Save?
Don’t confuse buying a car with financing a car. I understand that if you finance a car, you’ll end up owning it, but if you’re looking to remain debt free or achieve true financial independence… you have to avoid the “low monthly payment” trap.
Just because you have room in your budget for a $300 car payment, doesn’t mean you should. That $300 could be used to better your life, or help you achieve financial independence… not pay for a depreciating liability.
Another factor that may impact the price you pay is how long you have to save. If you’ve got 2 or 3 years to save, you can comfortably prepare to spend $15,000 or more!
It you’ve only got a year, or less… you’ll have to reevaluate your vehicle options. Or, consider how much repairing your current vehicle will cost.
- Related: How We Saved An Extra $532 A Month!
A sinking fund is a saving strategy to prepare for an upcoming purchase or expense. As you prepare for your upcoming car purchase, you’ll want to add a sinking fund line in your current budget.
A sinking fund works by taking the total price of your purchase and dividing it out evenly over the pay periods/months you have to save.
If you wish to purchase a $10,000 car and you have 2 years or 52 pay checks to save, you’ll end up with a sinking fund budget of $193 (rounded up) per pay period.
By saving $193 per pay, you’ll end up with $10,000 by the target purchase date. A sinking fund is like taking a ski lift off a financial mountain. You’ll need to put in the work and discipline to save, but it’s much easier than you expected it to be.
Create a car sinking fund as you plan for your upcoming purchase.
Where Should You Buy Your Car?
You’ve saved your money and you’re ready to make the purchase! Now what? Should you head over to the dealership, or look for a private seller?
Buying from a private seller carries some pros and cons. You’ll most likely find the best purchase price with a private seller. Private sellers may take a much lower offer than a dealer.
Depending on the seller’s patience and need for money, they may be far more willing to negotiate and accept less and move on with their lives. A dealer has the luxury of holding out for the next customer to stroll through the doors and buy the car at the ticketed price.
If your budget is tight and you’re looking to get the biggest bang for your buck, this is certainly the best option!
Another hidden gem that buying from a private seller offers is the chance for lower or no sales tax. Beware if you purchase a car outside of your home state, you will be obligated to pay your home state’s sales tax.
Purchasing your car from a private seller also offers the ability to ask detailed questions about the vehicle’s history. You won’t be able to get the in-depth knowledge about a car by purchasing it through a dealer, but you can verify their findings by running a CARFAX or AutoCheck report.
Also, don’t hesitate to ask that the car be looked over by a mechanic of your choosing. If the vehicle is in good working order, this shouldn’t be a contentious point during your price negotiation. I don’t want you to think people will lie, but why not “trust but verify”…
Cons To A Private Seller
Buying a car from a private seller isn’t a guarantee for massive success while searching for a new ride. There are some potential pitfalls to buying from a private seller.
You’ll miss out on most warranty offers and lose the “right to cancel” that states like California offer through dealership sales.
This “right to cancel” allows the buyer to return the car within two days if they decide the purchases wasn’t a good idea.
I love this because buyer’s remorse may slap you in the face and knock some sense into you if you’ve made a terrible financial decision.
Also, you won’t have the lemon law on your side. If you’re not sure what the lemon law is, you can read more about it here. On a basic scale, the lemon law prevents dealers from committing fraud or selling defective cars.
Sure, the common courts are available to you if you purchase a known defective car from a private seller, but that process is far more difficult than working with a dealership.
Finally, if you don’t perform due diligence and you purchase a car from a private seller, you’ll own any repairs that need completed as soon as ownership transfers. If the engine falls out of the car tomorrow, that’s on you…
Yet another reason to have your mechanic take a peek under the hood and ensure you know what you’re buying!
If you’ve never walked into a dealership before, it’s sorta like having a pocket full of pepperoni and walking into a dog shelter. You’ll be popular… quickly.
You won’t have many moments alone, and you’ll be quickly greeted by an all too eager sales person. I find this incredibly annoying, but I understand the point behind it.
This is a reason that I don’t like to search for cars while a dealership is open. Go after hours and browse their lot selection, or look online.
You’ll avoid the pushy sales staff and the potential to make a pressure decision falls to a nice, comfy zero.
Benefits Of Buying From A Dealer
Some benefits of buying your next car from a dealership include peace of mind. As I stated earlier, you’ll have the lemon law and some potential vehicle warranties to make you feel good about your new purchase.
Beware of up-selling though. Adding in warranties is a popular way to get more money out of you! Statistically, you won’t get your money out of the warranty and this is exactly why you have that emergency fund built.
Your emergency fund will cover those unexpected emergency repairs.
You’ll be able to find almost any car that tickles your vehicle fancy. There are a lot of dealerships, and ever more cars to choose from. You can shop online, or head to the brick and mortar to shop in-person.
Time will also be on your side. When buying from a dealership, you’ll have plenty of time to make up your mind. The odds of someone else wanting your specific car are low given the abundant car selection that dealerships are offering.
You’ll be able to ponder the decision and ensure this purchase is something you really want to do, and avoid impulse purchases.
Cons To Buying From A Dealership
Pressure!! If you’re working with a car salesman and getting close to making a purchase, you’ll be hit with a lot of “lets get this signed” pressure.
Your ability to negotiate shrinks during these interactions. Dealerships hold a lot of power when it comes to making a sale.
They can wait you out, since another ready-to-buy customer may stroll in to purchase a vehicle shortly after you leave in disgust.
You also won’t have the ability to obtain a detailed vehicle history. You can still run a CARFAX or AutoCheck, but it’s just not the same as speaking with the previous owner directly.
Buying A Car vs Leasing Final Word
Purchasing a vehicle is a massive financial purchase. The average monthly car payment for a new car has jumped to $523 a month according to Experian. The monthly financial burden of $523 is massive.
Your ability to fend off the desire to keep up with the Joneses will dictate your ability to maintain your debt freedom, and it will also dictate the speed at which you achieve financial freedom.
$523 a month is a huge chunk of cash that would be incredibly helpful in your investment portfolio compared to being dumped into a rapidly depreciating liability.
As you continue to consider the question of buying a car vs leasing, consider the long term consequences of the decision.
I think the majority of the time, buying a car outright that fits into your budget will be the right decision, but not always the most popular one!
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