Should You Buy or Lease Your Car? This is My Opinion

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My caveat for this post is as follows:

Nuanced in the premise of this popular debate is the subtle notion that a car, on some level, is an asset.

You can spin it any way you like: buying outright, buying through an installment plan, leasing, renting to buy, etc. A car will always be a liability! Lenders (for the most part) are the only institutions to whom a car is an asset as they can and do use them to make money.

I just want it to be clear that you will always be spending on a car in some shape or form. Even if you own the car outright, although you will spend on it less frequently, your spend events will most likely be larger ones (suspension overhauls, clutch overhauls, transmission repairs, turbocharger replacements or worse).

Personal finance experts always hinge this debate around making lenders the least amount of money, but lenders are not the only institutions you make money when you have a car in your life. Said differently, this article is to show you how to minimize your losses as you may inevitably have to have a car in your life in some shape or form.

I do not believe in a one size fits all approach, so I will start by unpacking each option and assessing its pros and cons, and yes, both options have good and bad elements. This may take a while, so bear with me.

At the end of this blog post I will present various life stages and career types and share which route may be best for you based mainly on these two metrics.

If you just want to hear my conclusion on the matter, you can just scroll down to the conclusion. If you want to be able to understand on what basis I have come to these conclusions, you probably want to read through my entire blog post.

Disclaimer:

If you are an exotic car flipper, now is a good time to read any other post of mine. This one is not meant for you. Moreover, I do not cover exotic cars in this post.

With that out of the way, let’s do some learning.

There Are Many Moving Parts (Excuse the Pun)

Gaining access to a car in your life is a complex task to achieve in an efficient manner. I have made my own mistakes which I have learned from, I have listened to many pundits opine around this topic and I also have a bit (just a little bit) of financial intelligence which I have been honing for many years to lean on when I give my advice.

There are three main parties that make money from you having a car in your life. The most obvious is the lender (and the dealer), but there are also the parties that make money when you service and maintain your car, as well as the receiver who makes money through sales tax and unrealized tax deductions you could have claimed.

Making a ruling on this debate based solely on how much you make the lender is superficial and dismissive, so I will add these other elements to my high-level analysis of this topic.

I will keep it high level and not perform any calculations but rather seek to make you aware of all the moving parts to consider when making your assessment because I want this post to make sense to everybody.

Vocation

I do not advocate linking your emotions with your spending, but it is the reality that some people may be more inclined to grow tired of their cars as they attain upward mobility vocationally. For some, this mobility is more rapid than it is for others. These individuals may want to change cars a little more frequently. Again, I do not advise making purchases based on emotions thus I thought I should rather advise on how best to do this, but I will reserve this for the conclusion.

Most importantly, some people can benefit from tax deductions as they may use their vehicles in pursuit of income. The receiver acknowledges that these individuals (or businesses) incur car ownership expenses that are not personal but for survival, and extends tax deductions to help compensate their losses. I don’t find any advice that exposes you to more tax to be good advice, so I am going to add it to the discussion. The tax element varies based on where you are and may not apply to most people so check with your CPA.

Credit Score

There are just about as many credit scores out there as there are individuals. This affects how lenders perceive us and by extension our interest rates. This may rule out financing in any form for some forcing them into exorbitant rent-to-buy type options, while it may open up a world of lean financing possibilities for others. There is no universal approach to car ownership.

Life Stage

Your age, career, address, marital status and the number of dependents you have all influence what type of vehicle is most relevant to you. We will get into this a bit more in the conclusion.

Vehicle Brand & Type

Some vehicles are more reliable than others, and thus maintenance costs and frequency will differ. Some vehicle types differ (hatchback vs SUV) and so do their upfront and maintenance costs. Some vehicle brands depreciate more rapidly than others. All of this needs to be taken into account on both sides of the debate.

Opportunity Cost

Buying a car outright is probably the most expensive way to cater to your motoring needs if one is to consider opportunity cost. You should probably read my post What I Accidentally Learned from My Father about Money to best understand this concept.

That money, if invested, could in many ways deliver better returns than the depreciation you will also fully own when you purchase a car outright.

Even when electing to finance the purchasing of your vehicle, options with higher monthly payments can cost you money that was potentially dedicated to an investment of sorts. What saves most from engaging in this analysis is that very few would actually dedicate their savings to investments, but it remains an opportunity lost nonetheless.

How Much Other Debt You May Want To Take On

Some people, like myself,  may be looking to minimize their exposure to debt as much as possible so as to free up more access to credit to use as leverage to grow their personal (or their business’) balance sheet.

BUYING A CAR

Options:

• Purchase outright (buy for cash)
• Purchase through financing

Upfront Buying Costs (excluding dealer and licensing costs):

• Purchase price of car
• Sales taxes on purchase price of car (paid in full upfront)
• Emissions tax (if applicable)
• Interest (if financed)

Advantages of Buying

• Unlimited mileage
• Freedom to make modifications (in line with warranties and maintenance plan)
• Lower interest rate (on average 3% depending on your country or state)
• You can build up equity in car

Disadvantages of Buying

• Higher monthly payments than lease option
• Down payment is necessary (my advice)
• Maintenance is responsibility of owner
• Unpredictable “ownership” and maintenance costs
• Risk of negative equity (increased if you do not provide a down payment)

LEASING A CAR

If possible. In general, as with all things, it is good to shop around and not to make it a secret to the dealers.

Upfront Costs (excluding dealer and licensing costs)

• Leasing is basically buying depreciation. This can be good or bad
• Monthly payments determined, for the most part, by a depreciation forecast (obviously a simplification)

Advantages

• You get to drive modern, more reliable cars (lease option not typically available on older cars)
• You get to change cars more frequently (term usually between 24 – 36 months)
• You only pay sales tax based on your monthly payment
• You are financing the depreciation component and not full purchase price
• Usually no down payment (lender may require one, but this is rare and is usually smaller by comparison)
• Maintenance is priced into lease
• More predictable vehicle “ownership” costs
• Better tax write-offs (full cost of lease for business owners) (varies by vocation and state/country)
• Cheaper than buying outright with financing
• No risk of negative equity

Disadvantages

• Mileage restrictions (10,000 – 15,000 miles per year) (exceeding this mileage increases depreciation)
• Hefty extra mileage penalties more exceeding allotted mileage
• High excess mileage penalties
• Higher lender interest rate (on average 5%)
• Higher credit rating required
• Have to purchase Gap Cover
• Your contract may have early trade-in penalties
• You hold no equity in the car at the end of the term

If you were to finance a car over a longer period (60 months) your monthly payment would be almost identical to that of the lease option but you would have the added advantage of owning the car at the end of the period which you can use as a down payment for your next car.

Will your car be worth much after 60 months? Will the value of your tax savings (lease option) (for those who qualify for deductions) be more than the value of the car after this term? And what about if you had invested all your savings over this period, would your savings (lease option) be less than the value of the car at this point?

The answer is not monolithic, and as cut and dry as Dave Ramsey and others make it seem to be, but hopefully, I have managed to make you more aware of the elements to consider in this debate.

Let Us Conclude

You may be an office-based employee, a consultant (salaried, fee-based or commission earner) or a business owner. Each of these variations should change the basis on which to make your decision.

How I Buy Most of My Cars

In general, my advice to most people is to buy a car as this is what most people understand. Buy a car that is three to five years old that preferably is still on an active manufacturer supplied maintenance plan. Check to make sure that you are getting a good deal by comparing it to similar cars.

Raise a down payment of about 20% the purchase price of the car you purchase (more if you travel a lot) as this will allow you to change your mind about the purchase and not be left with a shortfall because the car would have realized most of its depreciation before you even buy it. Take the car in for a thorough (101 point) inspection before or immediately after you take ownership of the car.

Present your inspection certificate to the dealership and get them to replace all the parts that may have been flagged in the inspection report.

This is me. It most definitely doesn’t need to be you. I may reach a stage in my financial journey where leasing will make more sense. One day, I may even elect to buy my cars cash one day. I could mix it up based on the vehicle type.

Other Considerations You May Want to Make

For those with more tax-advantaged vocations (consultants and business owners), leasing may be the best option. Many wealthy people choose to rather lease their cars and with good reason too. Consult your CPA before you take me at my word for it as tax laws differ based on where you are.

Retirees are the only people I advise to purchase new or demo cars. Depending on how much you have saved up, it may be best to get a smaller car that does not have a lot of electronics from a brand that is known to be reliable, cheap to maintain and that even a halfway decent mechanic can easily maintain and repair.

You wouldn’t want to spend your retirement income on major repairs or be forced into changing cars by high repair costs scenarios.

There is No Monolithic Approach to Answering This Question

We all have different jobs and careers. Some of us are investors, businesspersons, and entrepreneurs. We have different understandings of leverage and different uses for our cash reserves.

I have too often listened to Personal Finance expert opine on this topic in a glib manner, with a blasé perception of the notion of leasing cars.

It’s not that simple. You need to invest in increasing your financial literacy and understand money better and best apply your knowledge to your set of circumstances.

That’s my two cents worth. Take it with a pinch of salt, but use ALL the information to make your decision.