If you’ve ever gone through the process of researching a new car, you’ve likely considered your options: should I buy or should I lease? Although there are many working parts to both scenarios, it really comes down to personal preference and current situation. Recently I went through this same decision process last fall when we were looking for our next car. How did we make our choice? Let’s first take a deeper look into the main differences between buying versus leasing.
When you look at some of the main differences between each, it typically comes down to cash flow. At the end of the day, if you decide to lease, you need to be okay with having a monthly payment for the foreseeable future. Whereas, if you decide to buy, some people find it comforting to know that there’s an end in sight and that they’ll eventually gain that cash flow back.
Should I Buy?
When you buy a car, you typically have the options of buying it in cash or financing a loan, whether through a dealership or bank. The financing option may have an interest component to it, but a number of dealerships these days are offering 0% financing for a certain period of time, such as 72 month. It’s fairly straightforward, and not rocket science by any means, to determine the cost. The main concern with buying a car is the maintenance cost over time and guaranteed risks of depreciation. You will always have the option of extending the warranty on the car, for a price of course, but beyond that, the ongoing maintenance responsibility is on you. Statistically speaking, the average car will depreciate by 60% in the first 5 years. In fact, the day you drive it off the lot, your new car will depreciate approximately 9%. As you can see, a car is not an investment; it’s a depreciating asset that requires ongoing maintenance.
Should I Lease?
Now on to leasing. With a lease, the monthly cost is not determined based on the borrowing cost of the vehicle. Rather, it is based on how much it will approximately depreciate over the term of the lease. You’re limited on how many kilometres you can drive over the term of the lease, and you need to be mindful of this upon lease expiry as you’ll incur additional costs for each kilometre that you’re over. It’s human nature that we are more inclined to be interested in leasing before buying, because the cost is normally less each month. However, as I mentioned earlier, you need to be okay with an ongoing cost. It’s human nature yet again to be interested in leasing, because, in the back of our minds, we’re always going to get a shiny new car every 3 to 4 years. From a psychological standpoint, we won’t be spending our cash flow towards ongoing maintenance costs, and that makes us feel great. Dealing with car issues can be frustrating.
At the end of the day, there’s a trade-off between buying and leasing. If you decide to lease, you’re likely choosing this option because you want lower monthly payments without having to worry about major maintenance issues. However, if you decide to buy and you’re diligent about ongoing maintenance, you’ll statistically come out ahead of the game. A car that is regularly taken care of will cost you less money over the long run than an ongoing lease payment, even with the maintenance costs.
So, which option did I choose? Our previous two cars were both purchases, and we put a lot of thought and process into this decision. At this stage in our life, we decided to lease our car. It made sense from a business perspective, and, at the end of the lease, we have the option of buying the car out. If we decide to choose that option, the cost will come out equal to buying the car. Although that’s not always the case, nor is it guaranteed, we were comfortable with taking that risk based on our current situation.