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Buying & Leasing New Cars

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If your desire is a brand new car, there are two ways to acquire a vehicle. You can either purchase or lease your vehicle of choice. Both systems have their own advantages and disadvantages.

Leasing Basics

Leasing essentially rents the vehicle; at the end of the term you will not actually own the asset and will return it to the leasing company. It does have its own advantages. Your financial cost will be lower compared to purchasing the vehicle. Both your down payment and your monthly cost will be lower. This allows you to drive a nicer car than you can typically afford. Furthermore, every time your lease ends you will receive the option of driving a new vehicle, usually of the same model. You’ll usually drive a brand new car every 3 to 4 years. You will also have the option of purchasing the vehicle you have leased previously.

You should be covered in terms of unreliability. When you’re leasing the vehicle, ensure the warranty attached to the lease will cover repair costs. You don’t want to get stuck with the repair bill on a car you don’t own.

Lastly, you won’t be stuck with a substantial bill on sales tax. You will only pay sales taxes on your lease payments, which are a lower value than your purchases. When you purchase the car you will eventually pay taxes on the whole value. This creates a disadvantage. If you choose to purchase the car after you’ve leased the vehicle, you will be stuck with the sales tax on the full price paid. If there’s value overlap in vehicle price and money paid as rent, you’ll pay a portion of the sales tax bill twice.

Leasing Disadvantages

Double sales tax is the first of many disadvantages when leasing. Like previously stated, you won’t own the car at the end of the lease; you will have to purchase the vehicle. If you decide not to renew the lease agreement or to buy the car, you will need to purchase new transportation.

Since you don’t own the vehicle, your modification rights are restricted. Does your lease say you can’t have tinted windows, custom rims, a lowered vehicle, or subwoofers? Any customization not allowed by the contract will void your lease. It must retain all the original parts.

When you return the vehicle you will also have to pay for any damages that have been incurred on the car. Regular daily usage results in a slow functional decline that needs to be fixed at the end of a lease. This cost is passed on you, usually despite your warranty.

Your driving habits are also restricted. The lease will limit your miles driven per year from 10,000 to 20,000. The miles are actually total over the course of the lease but divided into the length of the lease. You will pay for any miles driven beyond this limit at the end of the lease.

Any decisions should be made before you enter the lease. If you want to get out of your lease, it will cost you early termination fees.

Last and most importantly, leasing is far more expensive over the long term. You will never own the vehicle, simply continuously pay leasing costs forever. You will pass the purchase price of a car eventually. A purchase completely pays off the vehicle.

 Purchase

Ownership has its own obvious advantages. You own the car, which means you can do whatever you want to it. You can customize it to the legal limit. You don’t have to worry about returning the vehicle, or driving under a certain mile amount per year.

But there are downsides to everything. Car ownership has a higher monthly cost compared to leasing the same vehicle. You’ll also have to place a substantially higher down payment. Your outflows will be higher until you completely own the car.

When leasing, your warranty covers the entirety of your lease. When you renew your lease on a new vehicle you receive a new warranty. If you own the vehicle you will pay all costs when your warranty eventually expires.

Your other issue is the car’s value. Your car will depreciate during its lifetime, eventually barely being worth anything at all. Almost all automobiles are depreciative assets. New cars lose large amounts of value when driven for the first time. Negotiation and wisdom are especially important when purchasing a new vehicle to negate losses due to car pricing, financing, and fees.

Situational Comparisons

In actually, leasing is beneficial but only in the short to midterm. Leasing is a solid option if you will be living somewhere for one to three years and don’t want to spend tens of thousands of dollars on a car. You also get to rent a better car than you would typically be able to afford. In the long term, buying the car is better. It’s better to simply own the car after 3 years, instead of paying 6 years on a lease. Leasing will allow you to drive a constantly new car, but you’ll never own it. You can’t trade it in or ever treat it like it is really yours.

Earlier we said, “Almost all automobiles are mostly depreciative assets.” Note the word almost. Some categories of cars appreciate over time, either instantly or over the long term. If you can afford it, consider buying them and keeping them in premium condition. If a car is a classic or limited production run that is extremely likely to increase in value, this may become an investment purchase.

If the car has large amounts of rebates or cost reductions, it may be instantly resold for more than its value. This strategy, called “flipping” is highly unreliable but is occasionally possible. Note that dealers of cars with high rebates or reductions may try to compensate in other ways, such as lowballing your trade-in offers or trying to stick you into a loan with a high-interest rate. Flipping is obviously only worth doing if the profit exceeds the cost. The higher the profit that can be guaranteed, the more motivated you should be to engage in the flip. Note the word “guaranteed”. The buyer and the price should be assured. You might even want to find a buyer before purchasing to sell.

When buying a new car for your own personal usage, you may be tempted to buy the fully loaded best model… even if you don’t need it for yourself. Don’t pay for things you don’t need or won’t use. These features drive up the price at purchase, might increase your insurance costs, and will increase repair costs. In time, these features will need to be repaired or replaced. Avoiding them saves you money.

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