In this post, we’ll explore the three main ways to acquire a vehicle, evaluate the most cost-effective option, and discuss key considerations to keep in mind.
Let’s dive in!
Main Options
- Outright Purchase
Buying a car with cash means no monthly payments or interest. While this may not be feasible for everyone, it serves as our baseline for comparison with financing and leasing. - Financing
With financing, you put down a deposit and pay the rest in installments. At the end of the loan term, the car is yours, but you’ll incur interest charges. - Leasing
Leasing is akin to renting the car for a set period (e.g., 2-3 years). You avoid concerns about the car’s future value and can switch to a new model once the lease ends. However, you don’t own the car and there are usage restrictions.
Cheapest Option (Calculations)
Let’s say you’re eyeing a Jeep Wrangler priced at $48,486, including taxes and fees, with standard options. We’ll base our calculations on the following assumptions from the Jeep website:
- Term: 3 years
- Annual Mileage: 18,000 km (total 54,000 km)
- Interest Rates: 1.99% for financing and 7.99% for leasing
We’ll start with two scenarios:
- No Deposit
- Resale Value: $30,000 or $35,000 after 3 years
- Cash Purchase Cost: $13,486
- Financing Cost: $15,004
- Leasing Cost: $18,396
With no deposit, the cost of cash purchase is lower, but factoring in opportunity cost (potential earnings from investing the cash), financing may be more cost-effective if interest rates are favorable.
- $5,000 Deposit
- Resale Value: $30,000 or $35,000 after 3 years
- Cash Purchase Cost: $13,486
- Financing Cost: $14,370
- Leasing Cost: $15,780
With a $5,000 deposit, financing becomes more affordable, and leasing costs decrease due to the reduced interest rate.
Key Takeaways
- Higher Resale Value: Generally, purchasing outright or through financing is cheaper if the car’s resale value is high.
- Lower Resale Value: Leasing might be more economical if the car depreciates significantly.
- Interest Rates: If financing rates are low and investment returns are high, financing can be a better choice than buying outright.
Pros and Cons
- Buying Outright
- Pros: No monthly payments or interest; peace of mind.
- Cons: High upfront cost; opportunity cost of cash.
- Financing
- Pros: Own the car with lower initial cost; potential for higher resale value.
- Cons: Monthly payments; interest costs.
- Leasing
- Pros: Flexibility to switch vehicles; no need to sell.
- Cons: Mileage restrictions; no ownership; potential extra costs for damages.
Additional Considerations
Don’t forget to factor in ongoing maintenance and insurance costs, which can add about $300 per month. Explore tax incentives, rebates for zero-emission vehicles, and potential tax deductions if you’re a business owner.
Thanks for reading up to this point! I hope this helps you make a more informed decision about your buying your next new vehicle!
