Financial Literacy Month: Should You Lease or Buy a Car?
By Rachel Brumenschenkel ‘18
Would you like a brand new car? How are you going to finance this purchase? For the second blog post for Financial Literacy Month, I wanted to share strategies when looking into purchasing a car and different options to consider. Many students who are about to graduate may find themselves in a position where they need a new car, especially if they currently do not have a car on campus and will need a car to drive to work. One of the most important financial decisions that will need to be made is if it would be more beneficial to buy or lease a car.
What does it mean to buy or lease a car?
There are many differences between buying and leasing, but the most basic difference deals with ownership. When you purchase a vehicle, you obtain ownership of the vehicle. You can customize it how you wish, drive it as far as you desire, and dispose of it or trade it in whenever you want. You will have to pay for the full amount of the car usually by obtaining a car loan.
If you decide to lease a vehicle, on the other hand, you do not own the car—you are basically renting it—and will have to give the car back to the dealer at the end of the lease (unless you then decide to buy it at the residual value). You will pay monthly payments to rent the vehicle. There are restrictions on how many miles you can drive the vehicle, but you are able to drive a new car every 3-4 years by leasing.
Which option should you choose? There are many advantages and disadvantages of both options. Consumer Reports provides an example of the costs of leasing and buying a vehicle as well as more information about making the leasing vs. buying decision. The infographic at the end of the post provides more information.
What is the importance of financial planning when shopping for a car?
Financial planning is important when shopping for a car because there are many costs associated with driving a car. Costs like car insurance, repairs, gas, and maintenance will vary depend on the model of the car. You will need to find a vehicle that will fit your needs but is also affordable.
Most people are not in a financial situation that allows them to pay for a car in full when they first purchase it. Thus, a loan is required to finance the car, and those can be obtained through a bank or other financial institution. The dealership may also have financing options available. It is important that you find a loan with the lowest annual percentage rate (APR). The APR is the interest rate on the loan, which is the cost to borrow money. The lower the APR, the less money you will have to pay over time.
It is extremely important to consider the financial impacts when buying or leasing a car, as the monthly payments can be a significant expense and should be reflected in a budget.
What are other important factors to consider when buying a car?
Apart from gas mileage, safety, reliability, physical features, and price, there are other factors to consider when purchasing or leasing cars. Many dealerships and manufacturers offer rebates when purchasing cars. Rebates can lower the cost of the car, and certain rebates are usually applicable for only a limited time. Many manufacturers offer discounts for college students who are or will be employed, and that information can be found on each manufacturer’s website.
Additionally, it is important to understand the difference between the sticker price of a car and its invoice price. The sticker price is the price for which the dealership wants to sell the car, and the invoice price is the amount that the dealership paid the manufacturer for the car. You can try to negotiate the final price of the car to be close to the invoice price. Websites like Edmunds have information on invoice prices and the true market value of vehicles.