Should you buy or lease a car? Here’s the best strategy.
New cars are alluring.
You turn on the TV. A beautiful woman in a leather jacket gets inside her newly released, top-of-the-line Mercedes-Benz. With the push of a button, the car starts and asks her, “How can I help you?” You see the car drive smoothly and seamlessly on curvy coastal cliffside roads and wish that your car included touch-screen seat kinetics and voice control.
“Gosh, that life seems so glamorous. I wish I could afford it,” you think to yourself, as the commercial comes to a close. That’s when the offer lights up: you can lease this new model for just $339/month, an affordable price for a $60,000 car.
But are leases strategic?
Promotional marketing is a science, and car manufacturers have perfected the art of making our mouths water at the idea of driving a new model. Leases can make new cars affordable, and depending on your driving habits, might make sense in your wealth-building strategy. But monthly payments aren’t the only aspect to consider when you’re figuring out the most strategic budget for transportation.
What is a car lease?
You can think of leasing a car as basically borrowing a new car from a dealership. Rather than paying to own the car, you pay for the depreciation that occurs while the car is in your possession. It’s appealing because the monthly payments are usually significantly lower than most car loans. However, it comes with no shortage of restrictions.
Who shouldn’t lease a car?
The short and sweet answer: pretty much everyone should not lease a car.
The benefits of car leases are all short-term. In the first three years after purchase, it seems as if car leasees got a sweet deal: low monthly payments, a brand new car with all the bells and whistles, warranties, and sometimes even included maintenance.
But if you play out the benefits to ten years after purchase, you’re losing pretty big. At the end of your three-year lease, you have to give back your car to the dealership. You get nothing in return: no money for a down payment and you’re now car-less. Unless you had been saving for the down payment to buy a new car, your only option is basically to lease another vehicle, which traps you in the car payment cycle until you eventually buy a car anyway.
Other lease cons
- Mileage restrictions: You can only drive 10-12,000 miles per year with a lease, depending on the terms of your agreement. If you’re commuting to work or wanting to drive for Uber or Lyft, going over the mileage limits will quickly rack up a large sum in excess mileage fees. They can be around $0.20 per mile.
- Excess wear fees: You’re expected to return the car in near original condition, meaning you’ll be charged for damage or customization that wasn’t covered in the lease contract.
- No asset to sell: Even though cars are depreciating assets, it’s still desirable to sell the car to recoup some of your original investment. When you return a leased car, you get nothing–and you might be several hundred to thousands of dollars in the negative because of the above fees.
Who should lease a car?
There is one exception to the “you-probably-shouldn’t-lease” rule, and that is if your car lease expense is running through your business as a write-off.
Car leases can be smart decisions for business owners because tax laws view them as costs of equipment, meaning that you can write off up to 100% of the lease expense based on business use.
If you purchase a vehicle, you can still deduct some expenses like the interest on the car loan. For both leased and purchased vehicles, you can deduct things like business percentage of your gasoline, oil, insurance, garage rent, parking & registration fees, lease or rental fees, repairs, tires, loan interest, etc.
If you think you fall into this business-owner category and suspect you could be writing off more transportation expenses on your taxes, you should get in touch with a tax professional. WizeFi can help you find a reliable professional through the Connect with a Pro feature.
What are other options?
If you’re not going to lease a car, you can either purchase a car in cash or with an auto loan. Of course, a third option is to go without a car, but unless you live in a city–this isn’t a super plausible option for most Americans.
Who should get an auto loan to buy a car?
The short and sweet answer here is: pretty much everyone who needs a car and doesn’t have the cash available to purchase a car outright should get an auto loan.
If you get a five-year auto loan at $500 per month and you drive your car for ten years, you get five years of driving payment-free. If you continue to save that $500 after your car loan is paid, you’ll have $30,000 by the time you need to buy a new car–not even counting the money you’ll make from selling your old car. Then, you can buy your new vehicle in cash without any of the auto-financing headaches.
Who shouldn’t get an auto loan?
Depending on where you’re at in your wealth-building journey, avoiding car payments is advantageous.
Let’s say you’re a recent college grad living in a city with a relatively high salary and a low amount of expenses. If you can reasonably walk, bike, carpool, or rideshare around while you save up enough money to purchase your car in cash, you can avoid tying up your wealth-building dollars into non-productive debt.
If you are in a financial situation where you are currently barely able to make necessary payments like rent, food, and health insurance–it’s likely not a good time to increase transportation expenses any more. Instead, it’s more strategic to use that money to build up an emergency fund, then pay down other debts so that you have more income available to live on each month.
What if I can buy my car in cash?
If you’ve managed your cash flow in a way where you have a significant amount of extra cash available to purchase a vehicle, congrats!
Traditional wisdom says it’s always better to avoid loans. But figuring out if purchasing your car in cash is the most strategic wealth-building move will depend on each individual person’s financial situation. For example, if you already have no debt, it could be more advantageous to invest that large sum of money in an interest-bearing account or to use the money to pay off debt.
WizeFi can help you figure out the best place to put your money to maximize your future net worth potential. Once you’re a WizeFi member, you’ll have access to a tool that will allow you to test the long-term effects of different financial situations, like taking on another loan or investing $30,000.
The final verdict: Say no to leases.
There are several ways to talk yourself into the idea that a car lease is a financially smart move, but in almost all cases, the numbers say otherwise. Don’t let slippery car salesmen and glamorous luxury vehicle advertising sway you from thinking about your long-term financial goals. Purchasing a vehicle, whether in cash or through an auto loan, will almost always get you to them faster than a lease.