Leasing vs Buying
When I was growing up, Dad always told me that ownership of something meant that you actually held value in your hands, as opposed to renting. That’s the instruction I took to heart and embraced right into adulthood. Was that the best advice? When it comes to shopping for a new vehicle, I can see that there are certainly pros and cons for both leasing and buying a car. I can also see that there is not one answer for everyone, especially as there are different options now than when I was a pup.
At first, you may feel a little like a riverboat gambler; some considerations only reveal their importance in the future. You will need to consider equity, cash flow, resale value and tax benefits in each scenario. Ask an expert if you can write off vehicle expenses on your taxes. If you use your vehicle to earn a living a portion of lease payments can be written off, while a car you own needs to be depreciated over a number of years.
Let’s take a deeper dive.
Buying a New Vehicle
A new vehicle ranks among the major purchases that we make in our lives, perhaps only second to our home in value. As with real estate, you have some room to negotiate the price. The sticker price or Manufacturer’s Suggested Retail Price (MSRP) is generally just a starting point. That price may not include any add-ons you require. For some models a low MSRP might not include an automatic transmission, a feature some consider a must rather than an extra. Some wouldn’t enjoy driving without a stick shift. Decide what you need and has value for you as you negotiate. The dealer might have some wiggle room and might not. Some extras come with incentives from the dealership (extended warranty, upholstery and paint protection, etc), most often as part of a package. Once you have agreed to a price, you must decide if you will be paying cash or financing the purchase. While it’s true that you avoid interest payments if you pay cash, it’s smart to discuss financing options. Some manufacturers offer very attractive rates compared to a bank. In some cases the rate can be further sweetened by “buying down” the loan to an extent that the interest rate decreases by a couple of percentage points.
It’s also worth considering what else you might do with your money instead of paying for your vehicle outright. For example, if your money is making 3.5 per cent in your investment portfolio and the car dealer is offering 0.9 per cent finance rates, you are farther ahead to take them up on their offer. Why lose the additional 2.6 per cent that you’d otherwise earn in your portfolio? It’s almost free money.
Matt McHardy of Oxford Dodge/Jeep pointed out another advantage of financing to me. “In most cases, the financing is open-ended,” said McHardy, “so you can pay it off whenever you want. So, if you were trading your vehicle in early, you’d have an advantage of interest savings.”
A monthly payment can really make sense, but it’s always a thrill when you have paid something off and own it outright. You can keep it as long as you want or sell quickly without any penalty. What you get back from the sale is all yours.
If you decide to trade your vehicle in one day and buy another one from the dealer, the equity you hold in the trade-in is taken off the value of the new vehicle when it comes to calculating sales tax. You are only taxed on the difference.
When you own, you are free to customize the vehicle the way you like, but be aware that some changes can affect your warranty. You can install your own sound system, change the wheels and tires or get a custom paint job and really personalize your ride with chrome accessories, etc. If that’s important to you, leasing is not an option!
Leasing a New Vehicle
Leasing is basically renting, and you pay a fixed monthly payment throughout the term. You have the choice whether to buy out the vehicle at the end of the term for a pre-assessed price. The amount of your lease payment will vary depending on the vehicle price, the financing rate, the size of your down payment and the residual end value of the vehicle (determined by the manufacturer).
You’ve got some interesting options at the end of a lease. “You have an option to exercise the purchase option and keep it,” says Matt McHardy. “You might say, ‘Hey, I really love my car. I’ve got really low miles on it. The end value of my lease is $20,000, but today’s market value to replace that car would probably be more like 26 or 27 thousand.’ So, you pay it off and pocket the equity yourself.”
Acura West general manager Paul Jannery is a fan of leasing. “If you’re not educated as a customer then you don’t know what you’re missing,” says Jannery. “We want to give everybody all the information to make the right decision.” He points out that the gamble on what the car is worth at the end of a lease is in the buyer’s favour. The manufacturer has made their best guess what the unit will be worth at the end of the lease. If market conditions change or you’re in an accident during the lease, you can hand the keys back and walk away from it even though it has been repaired because the residual value could be less than the pre-determined buyout. The manufacturer takes on that risk.
You could be paying less per month when you lease, in part because you are only buying down the depreciation on a vehicle, as opposed to financing the full price. Plus, you have been driving the car since it was new. You know if there have been issues or whether it’s better value for you to buy it and continue to drive it for some more time. Or you can give the keys back and get another car with a full warranty.
Unless you have a crystal ball and can look ahead at what new technologies, market trends or your own economic position might be by the end of your term, leasing means you can wait and see without risking the entire purchase price of the car.
All leases have a basic mileage limit. How many joy rides and long road trips are you likely to go on? If know you are a road dog, you can “buy” up to a higher mileage allotment at the start of the lease, which will ultimately be cheaper than an overage amount. Let’s face it — your daily drive is meant to be driven.
With a lease, you are almost always driving a vehicle that is under warranty. The next leased vehicle you get starts the warranty cycle all over again. That will give you some peace of mind. And if your situation changes before the lease ends and you want to get out early, you can sub-lease the vehicle.
Remember that when it’s turned in at the end of the lease, the vehicle must be in decent, original shape. Some wear and tear is to be expected, within reason. Any accessories you added (that in-dash coffee maker, footbath, etc.) must all be removed to get the vehicle back to stock condition.
Most often, at the end of a lease you can just drop off the car and the keys at the dealership and walk away with a smile and a wave — or sign some papers and drive away in your next leased vehicle.
“I think manufacturers are always going to be pushing leases,” says McHardy, “because more leasing means more vehicle turnover. When people lease, they are more likely to get in a new vehicle more often.” And presumably this keeps the industry’s wheels, um, turning.
In Conclusion
What makes most sense for you, personally, may be different than for your neighbour. You owe it to yourself to examine your own situation and expectations and see what the latest offerings and incentives are before you make a choice. One thing is certain. Doing your homework before you sign anything will pay off in your favour. •
