Dear Carrie: I've been out of school for just under a year and have a nice steady job. I need a new car, but I don't know if I should buy or lease. I'm earning a decent income, but I don't have much saved. Your advice, please? --A Reader
Dear Reader: This is a good question for someone in your situation -- or for anyone looking to buy a car. And actually there are three car-buying choices: buy outright, buy over time or lease. Buying a quality used car outright and driving it for many years is probably the most cost effective over the long run. However, the need for a large amount of cash upfront makes that impractical for many people.
The problem with leasing or buying over time is that you end up financing (that is, paying interest on) a depreciating asset. That said, these two options do give you the chance to get on the road with less of an initial financial commitment. However, there's more to consider than your cash outlay when deciding whether buying or leasing is the better choice.
WHEN A LEASE MAKES SENSE
The biggest advantage to leasing a car is that it will initially cost you less. There are plenty of low- and no-down-payment deals out there. On top of that, monthly payments are usually lower than if you financed the same car. That's because lease payments aren't based on the value of the car, but rather on the depreciation of the car over the time of the lease. So leasing a lower cost car could be quite economical, especially in the short run.
For this reason, a lease might make sense if you think you'll be in a better position to buy in a couple of years. Most leases are for two to four years. At the end of the lease, you simply turn the car back in and either purchase or lease a different one. (This also makes leasing attractive for people who know that they will want a new car every few years.) One caveat is that the car must be kept in excellent condition or you may pay a penalty.
If you use your car for business, there's another plus. You may be able to write most of your lease payments off your taxes.
While all this sounds good so far, there are some disadvantages that you should consider. First, leasing is kind of like paying rent. At the end of the lease, you don't own anything. Beyond that, leases are restrictive. There is a mileage limitation, usually 12,000-15,000 miles per year. Drive more and you'll have to pay extra at the end of the lease. Also, you're pretty much locked into the time frame. If your life circumstances change, it can be very costly to get out of a lease early. (On the other hand, though, you will likely be able to extend your lease if you want to keep the car longer.)
Another possible issue is insurance. Should your car get totaled or stolen, the insurance company will only pay the value of the car at the time, not what's left on your lease. Many lease agreements offer gap insurance to cover such a situation, but if not, you could come up short.
WHAT ABOUT BUYING OVER TIME?
If you think you want to keep your car longer term or if you're uncomfortable with the restrictions of a lease, buying over time is another viable option. In today's car buying environment, it's possible to finance a purchase with nothing down and zero percent financing for a certain time period. This could make the initial purchase easier on your checkbook. But be aware that with these types of offers, the dealer often compensates for upfront savings with longer loan terms. The plus side is that when the loan is paid off, you'll own your car.
WEIGHING YOUR CHOICES
From a purely economical standpoint, it probably makes the most sense to buy a good used car -- preferably one still on warranty with very low mileage -- and keep it for several years. That way you get the pleasure of driving a fairly new car without financing the depreciation that happens as soon as you drive it off the lot. Plus, you'll have something to show for your money.
If you choose to lease, be sure to work with a reputable automobile dealer or leasing company. Read the lease agreement carefully. Find out if it offers gap insurance, what the charge is if you go over the mileage limit, and what the terms are should you decide to buy at the end of the lease.
There's no right or wrong choice. It depends on your current cash situation plus what you want from a car both now and in the future. Before you start shopping, I'd suggest running different scenarios on an online buy vs. lease calculator to compare both upfront and long-term costs. Seeing the actual numbers might be the ultimate deciding factor.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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