If you’re shopping for a new car, you’re likely wrestling with the decision of whether to buy or lease. The goal is to maximize value, but car dealers often push options that benefit them the most, not necessarily you.
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!
