Should I lease, finance or pay cash for my new car?
When looking at buying a new car, people will typically “go with what they know” when it comes to figuring out how to pay for it. If they financed their last one, they will probably do the same on the next one. But what if going a different route would be better for them, financially speaking?Now, let me be clear in that everyone’s finances are different and what may be best for you may not be for your neighbor. That said, oftentimes people will shut off the possibility of doing something else because they don’t fully understand the alternatives.
Option 1 – Paying Cash
This is obviously the easiest one to wrap your mind around. Find car, get the best price and write a check for it. This assumes that you have that amount of cash on hand! There are endless debates online as to whether that is a good strategy. AutoTrader.com has a nice write-up, as does The Motley Fool. Just be careful not to go too far down the rabbit hole on the comment section! Everyone and their brother has their opinion and isn’t afraid to share it.The upside for some people here is that they pay for the asset and don’t have any monthly payments. The downside is that it is a depreciating asset and loses value from the moment it is purchased and driven off the lot.
Option 2 – Financing
This option works best for people who want to own the car but don’t have enough cash to purchase it outright. Some will argue that they shouldn’t buy it if they don’t have all the money, but with that rationale the residential real estate industry would collapse! Finance contracts can vary in length (72, 84 and even 96 months!) and can be tailored to meet your budget. Some argue that financing too long is not good for the buyer, but if you’re good at making payments and feel confident in your ability to repay the loan, it may be the way to fit the car into your monthly expenses.It is always best to do some research on current interest rates if you want to go this route. Nerdwallet has a good writeup and Bankrate.com has a good financing calculator here to help. On top of that, if you’re going the new car route, the captive finance companies may have subvented (lower than market) rates to entice you to use them. This is where you see the offers like 0%, 0.9%, 1.9%, etc.
One note about subvented rates, however. Sometimes manufacturers will give you the choice of “bonus cash” or the rate. If you have good credit and qualify for a decent (but not subvented) rate, the payment could be lower by taking the cash instead of the rate. Check out this article and see the math for yourself.
Option 3 – Leasing
This option is the “scariest” to the uninitiated because it’s probably the least talked about at the dinner table. Essentially you are renting the vehicle from the lending institution for a prescribed amount of time and then have the option of either purchasing the vehicle at the end of that term or turning it back in and becoming a free agent again. Proponents of this strategy will say that they want to drive as much vehicle as possible for the least amount of money per month.US News & World Report covers a lot of the lease basics here, including terminology. Once again, doing a little homework here will help you out in the long run. Cars.com has a nice lease calculator that you can use to compare a lease to a finance contract. All you have to do is fill in the make, model, year and trim and it does the rest for you! One caution: make sure you look at how many miles you’re driving per year. If you underestimate and go over, the penalties can add up quickly. If you overestimate, you don’t get a refund, so just be as accurate as you can.
And that is only one way to lease a vehicle. If you like to go really deep in the weeds, you can read up about single-payment leases at leaseguide.com or multiple security deposits at Edmunds.com here. The bottom line is that leases, just like finance contracts, are customizable to your individual needs.
As a final note, the professionals here at Lexus of Milwaukee are always available to help you through your options. No one way is perfect for anyone, it takes a little time and effort to see which way works best for you!