Our Thoughts

Your Next Car: To Buy or Not To Buy – That is the Question

A few months ago a friend of mine decided to get rid of her 2001 Nissan Maxima, which she had purchased a couple of years ago for next to nothing. The old adage: “You get what you pay for” sure rang true, as less than a year later that car was costing her thousands of dollars in repairs! She spent Memorial Day weekend trying to get her car to a CarMax without it breaking down on the road, but finally it was successfully sold and she was officially carless.

Next step: Find another car! Over the next month, we spent a lot of time deciding whether she should buy, lease, or finance her next car, and here’s what we learned after consulting the team at FJY:

When It Makes Sense to Buy:
Buying makes sense for someone who likes to own a car for a long time. The past two cars I’ve had I planned to ride until the wheels came off, and I would say in both scenarios I came pretty close! If you buy a car, it’s yours to do with what you want, and – if you pay with cash then you don’t have to worry about monthly payments. This is especially key for people who are risk averse and uncomfortable with debt. Buying the car outright may also entitle you to additional rebates and savings.

The downside, from a financial perspective, is that you are paying the full value of an item that depreciates the moment you drive it off the lot. You may also be disrupting your portfolio or cash cushion if you need to liquidate other assets to come up with the cash. Upside: You can usually negotiate better deals if you buy outright.

PROS:
• Sole ownership
• Fewer unexpected repair bills (in the early years)
• No monthly payments (when paying cash)
• Zero debt (when paying cash)

CONS:
• Value begins depreciating immediately
• When interest rates are very low, it may make more sense to keep cash in your pocket

When It Makes Sense to Lease:
Most people think of leasing as a bad financial decision – but it doesn’t have to be. Let me share a few scenarios where leasing makes sense:

Leasing is a great option for people who like to get a new car every few years and would like lower monthly payments than a traditional car payment. This option gives you the flexibility to put less or even no money down upfront. However, if you plan on continuing to lease vehicles you also end up paying for a car that is never yours. Leasing also limits the modifications you can make to the car and the number of miles you can drive in a certain time period (otherwise, get ready for hefty fees).

One option that many people often overlook is that you can lease to buy. It essentially means that you lease the vehicle for a certain time period and then, at the end of your lease, you purchase the vehicle. This gives you the opportunity to take advantage of lower lease payments while saving up to purchase the car at a later date. It will also spare you from fees should you damage the vehicle or go over the allotted miles.

PROS:
• Lower monthly payments
• A new car every few years
• Brand new car – single owner
• Flexibility to buy at the end of lease
• Less money down (will mean higher monthly payments)

CONS:
• Recurring payments every month
• May not qualify for rebates and incentives
• Shared ownership with bank can limit mileage and modifications

When It Makes Sense to Finance:
Finally, financing may make sense in a few circumstances. If interest rates are low (or you can get a 0% APR deal), it hardly makes sense to pay cash for a vehicle. Why not keep that money in your pocket? If you have a Home Equity Line of Credit, you could use it to purchase a car and develop a plan to pay it off over time. This would not disrupt your nest egg or your portfolio and any interest charged is tax deductible. People who are OK with debt and who can afford higher monthly payments would usually be the best suited for financing their vehicles.

PROS:
• Take advantage of low to zero APR rather than spending cash
• Utilize HELOC and tax deductible interest (car loan interest is NOT tax deductible)
• Can help you build positive credit history if needed

CONS:
• Higher monthly payments
• Will carry debt

The advisors here at FJY were an excellent resource as we weighed all of the contributing factors involved in the acquisition of a new car – if you have questions related to your specific situation, they are always available to have a conversation.

 

-Eden Butler