Clients, friends, colleagues, and family ask me often, Should I buy or lease my next car? This question seems to make people crazy. I can only imagine it’s because it’s one of the first question that comes out of the mouth of the person on the car lot. Then, there’s the online research, which adds to the insanity. Don’t make this harder than it has to be. This decision will likely not bankrupt you or deplete your retirement account.
You should always make a car payment
Typically, this question is asked from a money-saving perspective: Will I save more money buying or leasing? I believe the decision tree looks like this:
- First, you should always be making a car payment, even if you own the car outright. If you borrow money to buy or lease the car, you’ll make a payment. But you should do this if you own the car. Why? Because buying a new car with cash is like going to a big party and not having a hangover the next day (this analogy is not mine, it’s Kathyrn Amenta’s). It feels really great. In 10 years, you’re going to want to have this party again, so you should be saving each month enough money so when you need a new car, you can buy another in cash. If you’re thinking about buying just to avoid the car payment, that’s the wrong place from which to make a decision. You will always have a car payment. Even if you borrow money to buy the car, when the loan is paid off, start making those payments to yourself.
- Second, what do you usually do with cars? I’m the first to admit that I engage whole-heartedly in the American infatuation with the automobile. I love to drive fun, fast cars. But when it comes to what I own, I buy cars and hold them as long as I can and run them into the ground. Let’s face it: It’s a depreciating asset. My commitment is 10 years or more to a car. If this is you, buy. If you like new cars or if you need it for image purposes professionally, lease.
- Third, do you have kids? Kids are notoriously hard on cars. They dent them with their bicycles, they throw up in them, they eat in them and leave their crumbs behind, they crawl all over the inside leaving scratches and bruises. If you have school-aged kids or younger, buy. Otherwise, you run the risk of a penalty when you turn the car in at the end of the lease. If you don’t have kids and you take pretty good care of your car, you might want to lease.
- Fourth, do you drive a lot of miles each year? If so, buy.
- Fifth, run the numbers, but don’t stress.
- Finally, decide how you feel about the environmental impact. (What you should do to protect the environment is probably best left to another professionally. I can amateurishly weigh the argument for/against a new car, but that’s not helpful.)
Now that you’re committed to the payment, if you don’t have kids and you don’t drive a lot of miles, in a low interest rate environment, I can make a strong argument for leasing. You’ll get a new car with all the new features and safety equipment every three years. If you love that new car smell, you’ll almost always have it. Let’s face it. That’s pretty fun.