In this episode, we tackle the question of whether it’s better to buy or lease when looking to get a new car. We start with a high-level overview, walk through some of the pros and cons of leasing, explain the pros and cons of buying, and based on that discussion tie it all together by sharing our overall thoughts on which option is best for which situations. As with most things in financial planning, there isn’t a universal “black and white” answer since there are both financial and non-financial considerations, but our goal is to help you understand which is right for you based on the specifics of your own situation.
Outline of this episode
- General overview of your new car options [1:21]
- The pros of leasing a car [3:36]
- The cons of leasing a car [7:37]
- The pros of buying a car [10:26]
- The cons of buying a car [13:37]
- Which option is better? [16:19]
- The recap [18:33]
Taking a look at options for getting a new car
When it comes to getting a new car, you have two basic options, you can either buy the car or lease it. When buying the car, you take ownership of it. When leasing, you're effectively renting the car. When buying a car, similar to buying a house, there are different options in terms of how you can go about doing it and how much you can put down as a down payment. You could pay for the car 100% in cash, put a 10% down payment then borrow the rest, put down a 50% down payment, or any combination.
When leasing a car there are also different options and flexibility, but generally speaking, there are a few key items you'll need to make decisions about. These include the length of the lease (most commonly two to three years), the number of miles you want to be able to drive each year (often 10,000 - 12,000 but this can be flexible), and the amount of money, if any, you'll put down up front for the lease. The choices you make here will collectively determine the cost of the lease and what your monthly payment will be to rent the car over the time period. As you can see, while it's a straightforward question of whether you should buy or lease, there are nuances even within each of the two options.
The positives & negatives of leasing a new car
Some of the biggest benefits of leasing include being able to regularly get a new car, the convenience of not having to worry as much about repairs or maintenance, the simplicity of it, not having to worry about reselling or trading in your car at the end of the lease, and the lower burden on monthly cash flow since compared to buying leasing typically involves less money up front and a lower monthly car payment (for the same car).
The biggest downside of leasing is lifetime financial cost since it costs more to continue to lease a new car every two to three years than it does to buy a car and drive it for many years. Other downsides of leasing include mileage restrictions (where you have to pay a penalty if you drive more than the miles allowed in your lease), the fact that you'll always have a car payment if you lease, and greater responsibility for taking care of the car since you'll have to pay extra money when you turn it in at the end of the lease if there's excess wear and tear beyond what's considered "normal" during the time.
The pros & cons of buying a new car
The biggest benefit of buying is that if you plan to drive the car for five to 10 years or more, you'll usually come out ahead financially compared to leasing. Other advantages include the freedom to drive the car as many miles as you want, the fact that by buying you're building equity in an asset (albeit a depreciating one), and greater flexibility down the road where you aren't forced to get another new car in two to three years like with a lease and can instead choose among more options for what to do next.
On the other hand, some of the downsides of buying include the fact that you're required to handle all maintenance and repairs (which can become more of a challenge over time as the car gets older), the uncertainty of what the car will be worth five or 10 years down the road given how quickly the car industry is changing, and less ability to get a new car every few years since that doesn't make financial sense when buying.
Whether to buy or lease depends on the situation, but as a general rule of thumb, the financially optimal approach is to buy the car and drive it for a long time, in theory, until it becomes uneconomical to repair. However, if you're someone who likes being able to get a new car every few years, you can decide whether you value that more than the incremental cost of leasing and if you do, that's okay.
Resources & People Mentioned
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup