Buying a car – lease or buy

Introduction

A couple of readers liked my car leasing story and wanted me to write some more about car leasing vs buying.  Let me first say, “You guys could have easily Googled this” and secondly, I am not the expert at all on this.  My only expertise in the matter is that a) I’ve now both bought and leased cars and b) I took a personal finance class in college, which I swear was the most useful class.  With that said, let’s begin:

Step 1 – Which car?

This is seriously 80% of the work.  Don’t waste time looking at prices and years online.  Take a Saturday off and go test drive cars.  I wasted 8 hours researching the Infinity Q40 deal, and within 2 minutes, my wife veto’ed it because ‘it looked old.’  So figure out what car you want for your needs.  Are you expecting a child soon?  Maybe not get that 2 door coupe.  Feel a mid life crisis coming on like yours truly?  Maybe get that 2 door coupe.  Audi or BMW?  Electric or hybrid?  Toyota or Honda or even Kia/Hyundai?  How much can you afford?  Trust me.  Spending a day test driving cars will be much more productive than researching online.  Just walk into the Lexus dealership and tell them you are looking for an SUV or a sedan or a coupe.  Have them show you the models and then test drive a couple.  The key here is DON’T WASTE TOO MUCH TIME AT ONE DEALERSHIP.  Test drive the car.  Say you enjoyed it.  Tell them you’ll think about it and you’ll get back to them if you’re interested.  Then move on to the next one.

Step 2 – New, Used, or Lease?

Now that you’ve narrowed down your choice down to a couple of cars, ask yourself how long you plan on keeping the car.  That will decide whether you buy or lease.  If you think you’ll want a new car in 2-3 years, then LEASE.  If you think you’ll keep it forever, BUY USED.  If you HAVE to have a new car or if you’re impatient or if you don’t really care in saving money on used or if you MUST have a warranty, BUY NEW.  I’ve never bought a NEW car just because I am cheap.  My father in law did buy my wife’s Hyundai new, but that was when the ‘cash for clunkers’ deal was going on, and since a NEW Hyundai was already so cheap, it didn’t really cost him much more to buy new.  Here are the pros and cons of each:

Lease

• Advantages – New car smell.  Trade it in for a newer car in 2-4 years.  Don’t have to worry about major maintenance.  Bragging rights to all your friends until they give you the stink face when you tell them you’re just leasing it.
• Disadvantages – Most expensive option of the 3 (well besides BUYING NEW and selling within a year or two… shoulda leased in that scenario)

BUY NEW

• Advantages – New car smell.  Don’t have to worry about major maintenance until warranty expires.  Even more bragging rights to all your friends, especially when you tell them you BOUGHT instead of LEASED
• Disadvantages – Your car just depreciated 5% as soon as you bought it

BUY USED

• Advantages – Cheapest option
• Disadvantages – If it’s out of warranty, could be expensive to repair (esp German cars.)  Not so new smell unless you buy a strawberry air freshener.  No bragging rights since you would only casually bring it up in a dinner conversation.  “Oh hey everyone, I just bought a USED 2011 blah blah” said no one ever!

An example

Let’s say you went test driving cars this weekend and decided you really liked the Acura MDX SUV (the #1 best selling SUV in the US).  Now if you are more than 50% sure that you won’t be driving it in 3 years (say you are here on an ex-pat assignment,) LEASE IT.  If you think you’ll be BORED with the car in 3-4 years because you have ADD or ‘always want the newest stuff,’ then LEASE IT.  The next question is – how important is NEW to you?  Would you rather save $5,000 by buying a 3 year old car with 40,000 miles on it?  Can you live with not knowing the history of the car?  That you are sitting in someone else’s fart bubble the past 3 years?

Leasing the car

Let’s say you wanted to LEASE the car, first off, you should read Philip’s article about how to get the best lease deals.  Currently, Acura is offering $439 a month for 36 months and $3,000 due at signing for the 2016 Acura MDX ($43,000 MSRP.)  Let’s say tax, title, and document fees come out to an additional $1,000 and so your total ‘drive-off’ cost is $4,000.  To make this simplistic, I’ll assume the money factor is nearly 0.  That means you can divide $4,000 / 36 months = $111 + $439 = $550 + tax.  That means to lease this car for 3 years, you’ll be paying $550 a month for 36 months for a total of ~$20,000.  OUCH.  Fast forward 3 years from now and you would have paid $20K and have no car to show for it!  This is the reason why people hate leases and will give you the condescending look like you’re throwing away money.  By the way, you SHOULDN’T DO THIS LEASE regardless because you want to pay $0 money down since down payments are non-refundable (read Phil’s article.)

Buying the car NEW

Now if you were to BUY the car NEW, I did a quick Bankrate.com calculator on it ($43,000 for 36 months at 3% APR gets you a monthly payment of $1,250+tax.  OUCH!  Now most people would most likely do a 5 year loan, which gets you down to $772+tax a month, but for this example, I wanted to do the same time frame comparison.  Another thing to note here – in most states, you only pay the tax on the monthly lease amount, so if you leased it, you’d be paying taxes on $20,000 vs paying taxes on the $43,000.  Regardless, if you bought the car NEW, then after 3 years, you’d have fully paid off the car and now the car is in your name and you can run it into the ground.

Let me throw out an unlikely scenario for you.  Let’s say that after 1 year, you got a new job and now work is providing you with a free car.  You no long need the MDX and want to sell it.  In this scenario, let’s assume you live in WA state with a 9.5% sales tax.  $43,000 * 1.095 = $47,000.  Now how much do you think you can sell the car for?  Certainly not $43K.  Maybe $40K if you are lucky.  More likely, you’d be selling the car for about $37K.  That means you’ve “lost” $10K on the car since you paid $47K and now you only got $37K for it.  In this scenario, as you can see, the 3 year lease of $20K * 1.095 = $22K / 3 years = $7.3K would have saved you money (assuming you can easily transfer the lease to someone else.)  The point I’m trying to make is that one of the worst financial mistakes in buying cars is buying a brand new and having to sell it within the first year or two.

Buying the car USED

Now let’s say you are more fiscally conservative and decide you’d rather buy a USED MDX.  Now the question is – do you want to buy from a dealer or private party?  If you buy from an Acura dealer, then it may be a certified preowned, which may cost more, but usually will have extended warranties.  So you have to ask yourself – how risk averse are you?  Are you wiling to pay for the warranty?  When I bought my used Audi S5, I decided to buy an extended warranty from the non-Audi dealership because I wanted the peace of mind of a 3 year warranty.  If I had bought an Acura MDX, I trust in the reliability of Acura and probably wouldn’t have.  Only you can answer this question.  If you don’t want the warranty, then buying from a private party is the way to go.  You can buy from Craigslist, cars.com, autotrader.com, truecar.com, etc.  Make sure you pay attention to the features of the car too (does it have NAV, a backup camera, heated seats, etc).  Some people like to take the prospective car to a mechanic to see if there could be any potential problems.  As you can see, all of the possibilities makes some people’s heads explode, and they just decide to buy NEW to not have to deal with all these questions.

Conclusion

A wise person once told me, “Look Vinh, buying a car is never a sound financial decision.”  And he’s right.  If you can get from point A to point B in your 1980 Honda Accord, then more power to you.  A brand new BMW will get you from the same point A to point B in probably a bit less time but a lot more comfort and enjoyment.  What do you value that enjoyment?  Do you value it as much as $500 a month?  A $1,000 a month?  Do you have the discretionary income to afford the monthly payments?