The question of whether to Buy or Lease a car is a common one, and understandably so. Until you get older, you haven’t experienced car buying very often so it’s not something you’re comfortable with. Also, if you’re buying a used car, you cannot lease so the option has never come up. Before getting into what to do, let’s understand our options.
When financing a car, the process is much more straight forward. The payment calculations are pretty basic. Take the total price of the deal, divide by months financed and apply an interest rate.
This is easy to understand and there is no room for fuzzy math to confuse you. The simplicity has made it the go-to option for most car buyers. Also, we value the idea of ownership and financing is the most obvious route.
Trying to understand how car leasing works seems easy from a high level. However, when you get into the details it’s much more complicated. Many more factors go into the cost of leasing a car. There isn’t an “interest rate” per se.
The car payment is calculated using a formula involving the residual value of the car. The residual value is how much the manufacturer thinks the car will be worth at the end of the lease. The type of car and the amount of miles driven throughout the lease determines the payment. Two cars with the same MSRP can have a different payment due to residual value.
I haven’t even gotten into the mileage limits or the insurance requirements, but you can see how complex this can get. It is easy to see how somebody would be hesitant to lease.
Leasing has to also overcome the stigma involved with “renting” a car. It’s paying for something that you will never own. We are encouraged to buy a house to become a homeowner so why wouldn’t the same apply to buying a car.
That same psychology works for financing cars. We like the feeling of ownership, even for items that have little market value. No longer having to make a car note is also a nice feeling, even if it takes 5 years to get there.
What to do?
I believe that we should put our Finance hats on when we evaluate this decision. It is smart to own Assets, things that increase in value or produce income. Things that drop in value should be leased or rented.
Cars are not Assets and begin to drop in value as soon as purchased. They should be leased. It is not smart to continue to put money into something that looses value.
By the time you pay for the vehicle, it is worth a fraction of its original value. Not to mention the fact that the cost of repairs and maintenance increases as the car ages.
The lesson you should get from this post is the difference between Assets and Liabilities. Assets are things you own that earn money. Liabilities are obligations that we must satisfy.
Cars do not make you money and do not increase in value. We should not own them, but they should be leased.
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