Leasing vs. Buying: a classic debate
Your car is arguably the most important thing in your life. We live in our cars and
we use them to get to work to pay for our “real” homes and all other aspects of our life. Cars are no doubt essential to our ability to function, however, they are the greatest expense in our lives; but, it is also the expense that is the most flexible in terms of being able to save money.
One of the classic arguments in finances, and one of the biggest dilemmas facing new graduates, is whether to buy or lease a car – whether to pay less now, or have an investment that may pay off in the future.
To understand the question and to be able to make an informed decision you have to understand the nature of leasing and its inherent differences from buying.
When you purchase a car, or take a loan out for a car, you are financing the total cost of the car. When you lease a car, you are only financing the estimated depreciation value over the course of your leasing agreement.
So let’s say a $30,000 car will depreciate $10,000 dollars over three years. If you lease, you will finance $10,000 dollars over a three year lease. There are other costs involved such as the financial rate, or “money rate,” which is similar to the interest rate on a standard loan.
To be quite honest, there is no right or wrong answer. The decision to lease or buy is largely based upon personal needs and tastes. If driving a new vehicle every 2 or 3 years with little to no maintenance costs with a low monthly payment is important to you, leasing might be the best option. If actually owning something and having an investment opportunity is important and you can afford higher monthly payments, buying a car might be the best option.
One of the benefits of buying the car is the opportunity you have to use the car as an investment. If you purchase a new car, drive it for two or three years and then sell it, you can make a significant portion of what you paid for the car back. If the car has a high resale value, you might even be able to earn back almost the purchase price.
Another thing about buying a vehicle is, if you are not looking to use the car as an investment or driving a newer vehicle is not important, you can pay off the car and then be debt free for a while. This is likely not the best option for a new graduate as it requires not only the higher payments associated with buying a car, but also the added cost of paying off the loan sooner. This is probably too high of a financial strain on someone who is already under the gun so to speak.