While the decision to buy or lease a car can be a tricky one, a quick evaluation of your financial situation can help you decide which option is best. People who lease a car typically do so because it allows them to drive a newer car for less money than it would cost to buy one. According to the car experts at Edmunds, young adults are far more likely to lease. In fact, more than one-third of millennials in 2016 were opting for auto leases.
At first glance, leasing is an appealing option. The payments are lower, so you can afford to drive a nicer car. But with a lease, you’re essentially just renting a car for three years. You do have the option of buying the vehicle after the lease period comes to an end, but very few people go that route. Instead, they’ll return the car and lease a new model with the latest and greatest tech features. The problem with continuously rolling over into a new lease is that you will never be without a monthly car payment, which can harm your financial situation.
How Often You Drive
Lease contracts put a limit on the number of miles you can drive before penalties, in the form of fines, are imposed. According to Bankrate, mileage restrictions may range from 10,000 to 15,000 miles per year. If you choose to lease, you should consider estimating how many miles you drive per year and round up to the next mileage limit available on the lease. If you exceed the limit, prepare to pay a fee at the end of the lease which can range from 10 to 30 cents per mile.
The purchase of a vehicle comes with its own drawbacks, too. Although cars are necessary, it’s important to keep in mind that they’re one of the worst investments you will make in your lifetime. According to CarFax, as soon as a new car is driven off the lot by its first owner, it loses 10 percent of its value, and another 10 percent after the first year. On average, a new car will lose 60 percent of its value after just five years. With that in mind, your goal when selecting a vehicle is to minimize costs because the return on investment will almost always be unfavorable.
Your Monthly Cash Flow
It’s up to you to score the right deal on a car that’s both reliable and doesn’t shortchange your future. If you’re making a monthly car payment of $400 to $500, but don’t have room in your budget to save for retirement, you may want to re-evaluate your situation. For example, let’s say that you’ve qualified for a 60-month deal on a new car where you pay $450 a month. On the other hand, you could opt for a car that’s two to three years old, costs you $300 a month and re-direct the $150 in monthly savings into a retirement account .
After five years, you’ll own the vehicle outright, but by paying less per month you’ve also managed to start building a solid retirement fund of nearly $10,500, assuming a 6% annual gain. If you follow this routine for each car you purchase leading up to retirement, you’ll continue to accumulate a healthy retirement fund.
How Long You Plan to Keep the Car & How Flexible You Need to Be
If you only want to drive a car for a few years, leasing is the most convenient option. However, if you need to get out of the lease before the term is up, you’ll still have to pay the remainder of what you owe on the vehicle beforehand. You need to ensure that you are able to fully abide by the terms of your lease before signing the contract.
Regardless of which option you ultimately choose, it’s important to be aware of the risks and rewards of both buying and leasing to help ensure that you enjoy a healthy financial future.