Getting a new set of wheels is definitely one of the more fun money decisions you’ll make throughout your life. Four doors or two? Convertible or SUV?
Also, is it better to buy or lease?
Before you race off to the dealership, it’s important to take a step back and think about your long-term needs. To know what’s right for you, start by asking yourself these 4 questions.
#1 What can you comfortably afford each month?
Most experts recommend your monthly car expenses, including your insurance premium, stay under 10% of your gross income. If you earn $50,000 a year before taxes, your monthly gross income is $4,166 and 10% of that is $416. But you need to factor in auto insurance which is about $70/month on average across the US, per the Insurance Information Institute. So your monthly car payment should stay between $300 to $400.
Generally, financing a car is a better deal long term. But per month, you can get more car for your money if you lease. The reason why leasing costs less is because you’re basically renting the car and paying for its depreciation, as opposed to buying the whole vehicle.
For example, financing a car valued at $35,000, with 10% down, could cost you around $600 a month for 5 years. Leasing that same car could cost you a hundred dollars less, or $500 each month for 3 years, which is the average length of a lease.
But two cars with the exact same MSRP could have completely different lease payments because it all depends on the type of car you get. Why? Because when the lease is up, the residual value, or the car’s worth when the lease ends, is dependent on the car’s make and model.
So while it could be valuable to start your research by using online leasing calculators, you’ll get a better idea of how much your lease payments will be if you shop around to dealers for actual quotes.
#2 How long do you plan to drive your car?
The average car is on the road for about 11 years. If you don’t mind having the same ride for more than 5 years, buying is a good option because once you’ve paid off that loan, you’ll only have to cover routine maintenance.
On the other hand, consider leasing if you can’t commit and can’t get enough of that new car smell. Tom McParland, a writer for Jalopnik, a site for car enthusiasts, says a common mistake people make is to finance a car, but end up trading it in every 3 years. “Those folks would be better off leasing. If you’re going to be in the cycle of car payments anyway, leasing means you don’t have to worry about the trade-in value which can often be less than you expect it to be,” says McParland.
On top of that, when you lease, you don’t have to worry about car maintenance since most warranties will last as long as your lease does.
#3 Do you want to modify your car?
Can you commit to the full lease term or do you want more room to improvise? Once you buy a car, you can do whatever you want to it. If you hate it, you can resell it, if you want to turn it into a low-rider, paint it, go at it. It’s all yours.
But if you lease, the car company expects you to return it to them in the same state they gave it to you, with normal wear and tear, but no permanent modifications. This rule also applies to any signs of an accident or excessive wear and tear.
#4 How far do you need to drive it?
When you purchase a car you can drive it for as many miles as you please. Leasing on the other hand has a yearly mileage cap of 10,000 to 15,000 miles a year. Exceeding that could cost you about 20 to 40 cents per mile. For instance, if you go over your annual cap by 1,000 miles, you’d be paying an extra $200 to $400, although it can be waived as you negotiate your next lease at the end of your current term.
“People often end up paying more at the end because they don’t calculate their usage properly upfront,” says McParland. Rather than “guesstimating” and thinking you’ll be fine with 10,000 miles, do the math by referencing your current car’s odometer and dividing it by the number of years you’ve driven the car. For first time car-owners who want to lease, consider going with the higher mileage programs to give yourself a safety net, says McParland.
Jeanie is a reporter at Yahoo Finance. Reach out by email firstname.lastname@example.org; follow her on Twitter @jeanie531.
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