14 May 2018
Perhaps you’re finding yourself in a situation similar to mine. My bright orange 2004 SUV has seen better days, and I’m tired of its never-ending need for repairs. Time for a new car! But there are decisions to be made. What make? What model? And, importantly, should the next car be leased or bought?
Here are some key questions to help guide the decision:
How long do you expect to keep the car?
I’ve always purchased my cars, expecting to drive them for 100,000 miles or until they break down, whichever comes first. I’m rethinking that expectation, however, due to:
RAPID CHANGES IN TECHNOLOGY. The car I’m still driving doesn’t have bluetooth technology – but does have a cassette deck! Electric vehicles and parking assistance have recently been introduced, but are not yet standard in most cars. These features and others are expected to be widely available, at lower cost, by 2021 – important information when considering a three-year lease.
LOWER MAINTENANCE COSTS. The standard car manufacturer’s warranty of three years or 36,000 miles is in place for the entire life of a car lease. This is not a small consideration given the costs of repairing and maintaining an aging car.
NEW CAR SMELL! It’s nice to upgrade to a new car every few years. Personal preference will dictate how much weight to place on this.
How much will you drive the car?
Most of my driving is done locally, as evidenced by the relatively low mileage on my close to 15-year-old car. I do like the flexibility, however, of driving upstate for the weekend without worrying about putting too many miles on the car. I need to consider how much I’ll be driving, since:
Lease agreements limit the number of miles you drive each year. The limits are relatively low: from 10,000 to 15,000 miles per year, and the penalties of 20 to 25 cents per mile can add up.
What can you afford?
Both the upfront cost and the monthly payments are lower for a car lease than for a car purchase. When you lease, you are paying for the amount of value the car loses, or depreciates, over the life of the lease, rather than the full cost of the car. So it’s important to pay attention to the:
RESIDUAL VALUE, which is the car dealer’s estimate of what the car will be worth at the end of the lease. The higher the residual value, the lower the lease payments. That said, a higher residual value may make it harder to sell the lease, break the lease before the end of the contract, or purchase the car at lease expiration.
MONEY FACTOR, which is equivalent to the interest rate being charged on the lease. The money factor is often not disclosed, and is affected by your credit score. Multiply the money factor by 2,400 to compare it to average auto loan rates.
My decision’s been made! I’m going to lease my next car. I anticipate driving locally, upgrading with the next technology cycle, and being able to afford a nicer car than if I were to purchase. As a small business owner, I also like the ability to deduct lease payments from my business income, whereas only the interest expense portion of car loan payments is deductible.
So what are you planning to do?