The Auto Show is in town which makes it an exciting time in Southeast Michigan. It’s also a great time to talk about the process of buying a new car. If you do decide this is the year you are buying a new car, it is important that even before you shop you know how you are going to pay for it. In that regard, the first issue that many people will face is whether you buy or lease a car.
There are benefits to both buying and leasing a car. A leased car has the advantage that at the end of the term of the lease you can just turn the car in and don’t have to worry about resale or trade-in. Particularly for people who want a new car every few years, a lease is an excellent way to go. On the other hand, when you purchase a car you have the flexibility of owning that car for as long as you choose. Unlike a lease where you will have a regular monthly payment, when you buy a car, at the end of the financing period or if you pay cash, the car is yours without having to make monthly payments.
If you’re thinking of buying or leasing a car, to me, the first question you should ask yourself is how long you plan on owning the car. For those of you who hold cars for five years or longer, leasing is generally not a very good option. On the other hand, if you only plan to hold your car for two or three years, leasing can be a very viable option.
The next issue to consider would be how many miles you plan to put on your car. The more miles you put on your car, the less viable option leasing becomes Typically, if you put more than 15,000 to 18,000 miles a year on a car, leasing can be a very expensive option.
Not all cars are created equal when it comes to leasing versus buying. In many situations because of the residual value of the car (what the automaker estimates the car will be worth at the end of the lease), leasing is not viable. The lower the residual value, the higher the lease payment. Therefore, from a purely economic standpoint, if you are going to lease a car you need to look for one that has a high residual value.
If you’ve made the decision to purchase a car, the next issue you need to decide on is how to finance it. Unfortunately, cars have become expensive. In fact, what people paid for a house when I was a kid, they’re now paying for cars. When financing a car it is important to remember that the interest you pay is not tax deductible. In addition, there are many options today to finance a car other than going through the dealership. The dealership is one option to consider and you should get a competitive bid from them; however, don’t forget about other options you have. The credit unions and banks also offer car loans and sometimes they can be competitive. One of the positives of the internet is the fact that it is easier to shop loans around than ever before. However, just like everything else on the internet, it is important that you deal with a reputable company.
One question I’m always asked about regarding car loans is whether someone should use a home-equity loan to pay for the car. One of the advantages of using a home-equity loan is that it will make the interest tax deductible which is nice. However, the key with a home-equity loan is to not only look at the rate, but also any cost you have in obtaining the home-equity loan. In addition, something you need to factor into the equation is the fact that interest rates are on the rise. The great majority of home-equity loans are adjustable rates which means as interest rates rise, so will the interest charged on a home-equity loan.
Buying a new car is exciting and for many people it is the second largest purchase they’ll every make. However, just like with a house where you want to make sure your house doesn’t own you, the same thing applies to a car. Don’t buy a car because you think it’s a good investment, because it’s not. It is important that you can afford the car, including the cost of maintenance and insurance. The last thing you want is for a car to be a financial burden. Therefore, don’t let the excitement of buying a new car dictate your decisions. If you do, you will find that your car owns you and not the other way around.