So, it’s time to dump that car your parents pawned off on you in college and get your own whip. You’ve got a down payment saved up and your eye on a couple of sweet rides. Excellent. Now comes the adulting piece: How should you pay for your new wheels?
First off, speaking from my coldly analytical financial planner’s heart, I believe you should try to pay cash for automobiles, preferably used ones. That might seriously limit your vehicle options, but it’s the healthy choice for your budget and financial future.
If you decide to finance a new car, you’ll have two options: buying with an auto loan, or leasing, which has become popular with Millennials. Here are some things to consider when weighing leasing against buying.
- From a purely financial perspective, buying a car and driving it pretty much into the ground is your best financing option. Yes, your monthly payments will be higher than if you leased, but at the end of the loan period you actually own your vehicle – and might enjoy the awesomeness of being car-payment-free for a few years.
- If you’re really into cars, consider leasing. It’s a convenient way to drive the hottest new models for two or three years without worrying about major repairs. But this is a personal satisfaction thing, not the best money move. Remember: Another word for “leasing” is “renting.”
- Think about leasing if your monthly budget is tight. Lease payments are typically lower than loan payments. But be warned: Breaking a lease is crazy expensive. If you decide to return the car early, you may have to pay ALL the remaining monthly payments AND a penalty fee.
- Check your credit before you go car shopping. Bad credit will jack up your car loan rate, but it might totally prevent you from leasing.
- Think about how much you drive. Leases usually come with annual mileage caps, ranging from 10,000 to 15,000 miles. Exceed the limit and you get charged for each mile you drive. So, if you have an epic commute or love to road trip, leasing may not be the best option.
- Do you take care of your things? While your leased car will likely be under warranty for the full three-year term, you must still handle routine maintenance.
Unlike purchased cars, which can be traded-in with scratches and dents, a leased car must be returned in pristine condition to avoid penalties.
Regardless of whether you intend to lease or buy, never discuss financing with the salesperson until you have settled on the price of your new vehicle and the value of your trade-in. When it comes time to discuss financing, remember that, contrary to popular belief, you can negotiate lease terms.
Think carefully and take your time in the car buying process. With a little bit of effort you’ll look both amazing and smart rolling up on your friends in that hot number that’s calling to you from the dealer lot.