Should you buy or lease a car?

The decision to buy or lease your car isn't something that probably (or at least hopefully) keeps you up at night.

I do get this question rather frequently in our client meetings and I thought it would be helpful to share my thoughts in this week's "light" material.

There are essentially two questions to answer here.

What are the financial pros and cons of buying vs leasing?

And how long do you plan to keep the car based on your preference and lifestyle?

These two questions are interrelated so I will do my best to show you how we approach it in simple terms.

Short answer

So this is usually how I frame the answer when our clients ask this question.

If you plan to drive your new car for over 5 years, you should buy.

If you prefer to replace your cars every 3 years or so, the lease option will likely work better for you.

We can certainly dig deeper from here.

Longer answer

Here is a list of questions or ideas to consider, to see if you gravitate toward the "buy" category or the "lease" category.

Lease-leaning:

Do you love luxury vehicles or want to drive the latest model all the time?

Do you typically only drive in your free time?

Do you want the most up to date safety features?

Do you want to take the guess work out of car expenses?

Does your car have an impact on your professional image?

Do you want lower costs in the short term (leases tend to have lower payments than buying a car outright)?

Buy-leaning:

Do you have a family to transport or do you have less interest in the age of your vehicle?

Do you commute more than an hour every day?

Do you have dreams or plans for a road trip?

Do you spontaneously travel or move frequently?

Do you have a dog or messy companions you like to take with you frequently?

Do you want lower costs in the long term (ability to sell the car later and payments will stop eventually)?

Once you start answering these questions, you will likely come to the right decision.

Practical thoughts

I work with different types of clients, those who drive their car to the ground and those who switch every few years, and here is what I learned from our conversations.

Since I'm a driver myself, I also have to make this decision periodically so I had to dig deeper myself quite a few times.

I recently had a client who drove her Camry for over 12 years without any issues. Once she retired, she wanted to try something new and leased a Hyundai Ioniq.

In her case, she actually wants to own but is not sure if electric is the right choice. Perhaps she will buy out the lease at the end, but she is just not sure yet.

This is actaully one of the benefits of leasing that people don't always think about.

It can be a low commitment way to test out a car you're not sure about and then make your long-term decision later.

Aside from the lifestyle questions above, your preference toward car maintenance is a large consideration for this question.

Many mid tier vehicles from certain Japanese brands are designed with reliability in mind. They tend to have significant resale value and relatively low maintenance costs.

These are the cars you want to own for a decade or even longer.

On the other hand, luxury and performance cars are usually not made to last that long (this is just a general observation and certainly not a rule).

It's entirely possible that your new "toy" will have no maintenance needs for a few years.

But once they start having issues, the repairs can cost more than the value of the car.

So leasing can be a smarter choice in the short and long term here.

Financial considerations

From the financial perspective, a lease is truly easy to account for in most cases.

You will have an upfront payment that is usually not very large and then you have monthly payments. That's it.

Keep in mind that your car lease will have a certain number of miles included and you will be charged more if you drive above the limit.

Also keep in mind the lease miles are negotiable in some cases. So don't be afraid to ask if you plan to drive 15,000 instead of 12,000 miles each year.

If you decide to buy, you would either pay cash or make a down payment and then finance the rest.

I happen to be a fan of the finance option because in many cases your interest rate is lower than your projected portfolio return, even if you prefer to invest more conservatively.

Just to give you a simple example, if your car loan is at 4% and your portfolio is projected to earn 7%, keeping your money invested and financing the car nets you 3% in the long run.

But I certainly understand that some people, and especially later in life, simply don't want to have any monthly payments besides their utilities.

Perhaps it goes without saying, but if you plan to own the car for more than 5 years, you should think about long term maintenance expenses.

One more thing worth mentioning. If you use your car for business, there are additional tax considerations worth exploring with your CPA.

In summary

For some of you, I know this is a very easy choice.

And for others, there are multiple perspectives to consider before you decide to buy or lease.

I would spend some time analyzing this but just wouldn't stress too much about it.

This is simply not the type of decision that would dramatically impact your finances in the long run and it is also reversible (but with some legwork required).

If you have any questions or would like to share your own experience, I would love to hear it!