Should I Lease or Buy my next Automobile?
Updated: Feb 6
Replacing an automobile is an inevitable and recurring life event, and clients often struggle to decide whether to lease or buy. There are advantages to both options and the analysis is not strictly financial. The needs, circumstances, and preferences of each individual client must be considered along with the overall costs. With many competing factors that bear different degrees of importance, it can be difficult for clients to prioritize their goals, weigh their options, and identify their best course.
To help you guide our clients as they consider whether to lease or buy an automobile, we have created this flowchart. It covers several key decision points based on factors including:
Costs and cash flow
Mileage and use
Safety and technology
Hi, Todd Pouliot, Gateway Financial. Feel free to visit us at www.mygatewaymoney.com. Got another video after we did the “purchasing a home.” A common question we also get is about vehicle purchases. And, this won't be too long of a video hopefully, but this flowchart will kind of take you through some different areas on, “Should I Buy Or Lease My Next Automobile?” Replacing an automobile is an inevitable and recurring life event and clients often struggle to decide whether to lease or buy. There are advantages of both options and the analysis is not strictly financial. The needs, circumstances, and preferences of each individual client must be considered along with the overall cost. There's many competing factors to bear different degrees of importance. And, it can be difficult to prioritize goals and weigh your options and identify your best course. So, in this guide, we're going to consider whether or not to lease or buy an automobile and this flow chart covers a few key factors. We want to look at cost and cash flow, mileage and use, safety and technology, depreciation and flexibility. And again, we're in a very unusual time right now where vehicles are very hard to come by. I know my brother-in-law personally had a vehicle totaled in an accident and we're more than thankful that he's fine. But the concerning part is how do you replace that vehicle and there's just not a whole lot available product at this time. So here we are. Do you like to get a new automobile every few years? Of course we'd all like a new car every year but how do you like to do that. If yes, do you drive a significant number of miles each year? Let's say you do. Leasing, even with a high mileage, may not be advisable due to the mileage limits and expenses per mile overages and wear and tear. They can be very very expensive. The reason why I love this flow chart is, believe it or not, I used to work for Saturn Automotive back in the early and mid 90s and understanding the leases and purchases was a very important thing that we used to cover with people. And these are very important questions that you would ask “Well, how many miles do you drive?” “What is the overage charge?” “Do you pay up front or do you want to pay in arrears?” So, if you do not drive a lot of miles, consider leasing your next automobile. And after that, are you a business owner? Yes. You may be able to deduct certain leasing and operational costs associated with the business use of your automobile. So again, tax accountant/CPA, make sure you talk with them, “How am I going to do this?” Most people just use the typical mileage and then multiply that by the IRS chart and I think this year it's 58.5 but we'll need to verify that with your CPA about what the best way is to write off the lease of your vehicle. And, leasing offers several advantages including short-term commitment, warranty coverage, and temporary use of a depreciable asset. Financial planning 101 books always say lease what depreciates and buy what appreciates so that's an easy way to do that. Be mindful of disadvantages of leasing and recognizing that the total cost over time may be higher than with ownership, particularly if you buy out your lease at the end of the term. Always know what those terms are, those residual value buyout terms. I have done both the lease and purchase in my years of purchasing several vehicles and sometimes it works out and sometimes it doesn't you just need to calculate it out. And, consider conducting a break even analysis as you assess the overall financial impact of either buying or leasing. I'm just going to bunch back again over here. Let's say you don't need one every year and – or every three years or however often you're looking at leasing for the every few years. Are you concerned about automobile safety features and technology quickly becoming obsolete? Now, not to date myself but I remember a time there there was no airbags in vehicles. And remember, that's added to the cost of a purchase of a new vehicle. Anti-lock brakes were new at one point. Now, we have dual airbags, side curtain airbags, all these different things that are much more safe for our vehicles to drive and we want to make sure do we have the latest and greatest technology in our vehicles? Just remember, that also increases the cost of those vehicles. So, if I am concerned about my car becoming obsolete, maybe it does become towards that lease conversation. I know we've had a lot of technology not just in safety, bluetooth and all the other things, our cars are becoming much more like a computer and that's why people are concerned about becoming outdated in their technology. If the answer is no, “I'm not concerned” Do you want flexibility in how long you keep the automobile and what modifications you can make to that vehicle? No sense in putting on very expensive rims or other types of things if you're just going to be turning that lease back in. If I don't need that flexibility, maybe we look at some other options here. So, the flexibility, I want the flexibility, I want to be able to do with my car what I want. Yes. Consider buying your next automobile and explore financial options that work best within your budget. Pay for it yourself though a dealer or through a bank. To be honest with you, I love that the last vehicle I purchased, we had enough cash set aside it was a wonderful, easy transaction did not have to deal with the bank as I did when I was much younger where I did need a car loan. Do you want to minimize the immediate cost of depreciation and minimize your purchase price? Yes. That sounds like a wonderful option. Consider buying a used automobile and take advantage of the depreciation that has already occurred. My last vehicle was a used vehicle and I love the fact that I did not have to pay for all that depreciation. And, do you want to minimize, let's say it's on the no, are you a business owner? Yes. You may be able to deduct certain ownership and operational costs associated with the business use of your automobile. Again, also make sure that you have updated your property and casualty or your automobile if it's used as a business purpose and that your agent, or whomever you use for your insurance on your automobile, is aware that it is being used for business. Buying offers several advantages including control over ownership, duration of ownership, discretion to use and customize, potential to protect value of the asset, and ultimately sell or trade it. It’s an asset at that point. Yes, it's a depreciating asset but let's say you got a vehicle that you absolutely loved and you leased it and you know, you don't like the buyout terms. It would be unfortunate to have to give that away. Be mindful of the disadvantages of buying. Sunk cost, depreciation, the responsibility of repairs potentially beyond the warranty, and the hassle of trading or selling your vehicle. So, those are very easy good discussions to have. It's not all about money, it's all about lifestyle. And, you know, are you going to be on the hook for warranty, are you going to do this? There's a lot of different things to think about when you're acquiring a vehicle. The number one cost you have every year is taxes, number two should be your mortgage or your home or wherever you live, and number three is typically your vehicle and a lot of the costs that are associated with that. And, people are looking at different options for vehicles as we move into this era where we have electric vehicles and you know, what are the long-term cost of replacing batteries if you do do a purchase on an electric vehicle? So, there's a lot of new technology coming out, we're seeing a huge increase in the price of fuel or petroleum or gasoline wherever you're you're dialing in from to watch this video. So, be aware of all the different factors and, “Am I buying the right vehicle for me and/or for my family?” You know, is your child in sports? Are you purchasing the right vehicle for you and for your family situation? And, we're seeing obviously, trucks over the last few years have been very high priced and now with the rising rates of fuel, maybe those are not going to be as advantageous to have a gas-guzzling type of vehicles. So, make sure you choose the right vehicle that's good for your family that's the first and most important thing, and then secondly, do I lease or buy and what are those decisions? Lastly, I do want to leave you with one little bit of information. Understand leasing may offer you some benefits and buying may offer you some benefits but ask what incentives may be offered to you besides dealer cash or customer cash, which is sometimes called a rebate. Sometimes they have special financing options and it might not be with the dealer, it may be at your local bank or credit union. So hopefully, this video was helpful for you and it's kind of a follow-up about buying a home or purchasing a home. And, I hope you enjoyed it. Thumbs up, click that subscribe button and make sure you ring that bell to get more updates from us as we move forward. Thanks, and have a great day.