Buy or Lease: What is the Best Car Ownership Strategy for You?

Wealth Advisor

In this video, Jamison Smith addresses the common dilemma of whether to buy or lease a vehicle, excluding business ownership scenarios and focusing solely on personal decisions. It breaks down the financial and philosophical aspects of each option, using a $50,000 car example to compare costs over time. Buying the car with a $5,000 down payment results in a total cost of $50,727 over four years, whereas leasing leads to a different financial pathway but potentially similar long-term costs, depending on decisions made after the lease ends. The video highlights the benefits of ownership, such as equity and no mileage restrictions, against the advantages of leasing, like getting a new car more frequently and lower monthly payments. Ultimately, the choice between buying and leasing is personalized, depending on factors such as how long one intends to keep the car and individual preferences for newness and maintenance convenience. The advice for dual-income households with children is to balance both options by buying one car for durability and leasing another for the benefit of regular upgrades.

Video Transcript

You. Common question we get asked is what’s a better financial decision to buy or to lease a vehicle? A lot of variables come into play here. One big consideration is if you’re a business owner, we’re not going to talk about that. If you’re a business owner or you have any type of self employment income, totally different scenario. There’s some tax benefits. We’re going to talk just strictly from buying versus leasing a car, just on a personal level. And so we’re going to break down the math of the difference and then we’re also going to just talk about philosophically what we think. Because a lot of financial planning decisions, there’s a financial aspect and then there’s a peace of mind aspect as well. So we’re going to assume a $50,000 car. In the first scenario, we’re going to buy the car.

 

We’re going to say we put 5000 down. So we’ve financed 45,000. At 6% for four years, that comes out to be a little over $1,000 a month, $1,050 a month. And so over four years, that total is $50,727. Obviously, the car depreciates, so you have an ending value of the car once loans paid off. Second scenario of leasing $50,000, purchase price same $5,000 down. This comes out to a four year lease is approximately $612 a month. There are some other costs. There’s different fees that could be variable depending on the dealership, taxes, fees, et cetera. But just from a high level, this is a close estimate. And so what this is based on is this is called the residual value of the car. And they basically estimate at the end of four years, what’s the value of the car left.

 

So $50,000 car, we’re going to say that’s about 25 grand after, and then after four years, you can buy it out. And so you would then finance or pay in cash. But if you finance that at the same, another four years at 6%, again, there’s variables here who know what interest rates are, that would end up being about 587 a month for four years. And so all said and done, the total after eight years, you would pay about $57,984 on this side if you were to stretch. So obviously in these two scenarios, buying is a little bit cheaper. But if you were to stretch that loan out for eight years off the get go and would not recommend doing this, but just for the sake of the example, that eight year loan is about $56,700 so we’re almost at the exact same destination.

 

So from a financial standpoint, there’s variables here. Cost of the car, the depreciation of the car, what interest rates are. There’s a million things that could factor into this. So we’re going to talk philosophically now to buying a car. There are some of the big pros to buying a car. So the positives would be you have ownership in it, you have equity, meaning that there’s value to sell the car at the end, you’re building equity even though cars are depreciating asset. There are no mileage restrictions like you would have with a lease, which we’ll talk about. And a third one is there’s no fees for wear and tear, meaning you just have to pay for the wear and tear yourself. Sometimes with a lease, if you mess something up, you have to pay for it because you don’t own it.

 

And so go over to leasing. Now, the pros to leasing. Number one, you can get a new car more frequently. Usually in the scenario we looked at, every four years you get a new car. It could be two to three years, depending on how often you want to do it and how much you stretch the payment out. Second thing would be, maintenance is generally very easy. If you need the oil change, you just take it into the dealership and they fix it. And the third thing is, it can be much cheaper. Like we saw on a monthly level, monthly payments are lower. Also going to look at some cons, though, cons of owning the car, depreciating asset. And the older the car gets, the worse the maintenance is, can get very expensive. And then cons to leasing.

 

The biggest one, which we hear often is the mileage limitation. Generally it’s 1012 15,000 miles a year. So depending on how much you drive it and you don’t own it, some people don’t like that. So, all said and done, which one’s better? Totally depends on your situation. We’ve really broken it down to this philosophy. Number one, if you think that you’re going to own the car for the length of the term. So four plus years, four, five, six years or longer, buy the car. If you’re going to own it for the length of the loan, go ahead and buy it. If you want the option to get a new car more frequently, go ahead and lease every two to three years.

 

You can just get a new car generally will be cheaper than just buying a new one every two to three years without it being paid off. So a big thing is how often do you want to buy a new car a lot of considerations. The maintenance too. Some people like leasing just because it can be easier and simpler with the maintenance. But if you are a dual income household with kids, generally what we say is buy one and lease one. You can lease one so you get a new car more regularly. Buy one that you could take on longer trips, that you don’t really care if it gets beat up a little bit with kids or whatever you’re doing with it. You don’t have to worry about the mileage restriction.

 

So totally case by case specific again, if you own a business could be a totally different conversation, but just a general recommendation. Depends on how long you want to keep the car for. But financially, really either way can make sense and depending on there’s a lot of variables but a lot of times they work out to be very similarly priced. If you have any specific questions on buying versus leasing a car, feel free to reach out.

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