I’d like to follow up last week’s post about using your tax refund money wisely with this one about leasing. Many people think it best to put down a strong downpayment and then purchase their next car. They usually put down a couple thousand dollars and pick out a nice used car with a payment they can afford. But what they might not consider is the maintenance that will be required during the next five years. Depending on the age of the car, the annual maintenance costs might prove to be higher than expected. That’s when leasing begins to make sense.
If you are already planning on putting down a couple thousand dollars as a downpayment for your car loan, why not consider using that toward the lease of a new car? A new car will not require much maintenance compared to a used one. For instance, if you purchased a 2009 car today (2014), it will be 10 years old when you finally pay it off. A leased car would only be three years old at the end of the lease. Besides oil changes and perhaps a pair of tires, your maintenance would be minimal. This is the upside to leasing.
Let’s look at some specifics. If you have $2500 to put toward a car, you could choose from several options:
You could keep driving your current vehicle.
There is nothing wrong with being content with what you have. But at the same time, you need to consider the future expenses involved with keeping your current vehicle maintained (especially if it is a 1990 Jaguar). If you originally bought an inexpensive car, these maintenance costs will escalate as the car grows older. What seems like good stewardship of your money may become the exact opposite as head gaskets, transmission rebuilds, and timing belts come due. But if the car is running well and you can afford to keep it maintained, perhaps the $2500 would be well spent keeping your car in good repair.
You could purchase a $2500 car.
This might be a good option if you have no money in your budget for a car payment. But with an inexpensive car, you often get what you pay for. Expect to have annual maintenance expenses of at least $1200. That’s $100 per month.
You could purchase a newer car.
If you have room in your budget for a $300 monthly payment, you would be able to afford something like this 2009 Volvo S80 with 48k miles and listed at $17,494. With a good credit score you could get a loan like this: 60 x $300 w/ $2500 down with a 4.0% APR (based on 7% sales tax, $250 doc fee, and $33.50 title/registration). That would be a nice car. But consider where you would be in five years if you drive 10,000 miles per year. At that point, the car would have 98,000 miles and you would have brought it to the dealer five times for maintenance (every 10,000 miles) and tires. That expense on top of your monthly payment might make you consider option #4.
You could lease a new car.
Leasing begins to make sense when you consider the cost of maintenance alongside your monthly payment. With a lease, your $2500 would make the payment closer than expected. For instance, Volvo of Willoughby is offering a lease special on a 2014 Volvo S60 T5 retired service loaner with only 4,800 miles on the odometer. You could lease the car with tax included for 36 x $303 (based on 7% sales tax) with $2500 due at delivery if you are fine with 10k miles per year. New Volvos come with Complimentary Factory Scheduled Maintenance for 3 years or 36k miles. That means that every 10,000 miles your scheduled maintenance is done at no charge to you. The only expenses at the end of the lease would be perhaps a set of tires, payment for any significant damage to the car, and a lease turn-in fee (waived if you lease another Volvo). For many people, that takes the hassle out of owning a car.
There is no one-size-fits-all answer to the question. All of these options could work for you. However, leasing does have its advantages when you consider the total cost of ownership. If you remember only one thing from this article, remember that your monthly payment and downpayment are not the only costs involved with owning a car. Take into account all the costs of ownership and see what makes the most sense for your budget.