Woman Speaking With Car Salesman

Several factors should be considered before getting a new vehicle.

A car salesperson I spoke with this year said everyone should always lease because this ensures having the latest safety features and never worrying about costly repairs. The down side is having a permanent car payment and taking the risk that you might lose the vehicle if you experience a major financial setback.

Buying or leasing is often triggered by the type of person you are, and everyone is wired differently. Consider there are probably three types of car purchasers. I’ll call the first kind image conscious. They’re more concerned about looking cool or having fun, new things more than others typically are. I’ll call the second type wise owls, those who want to minimize cost and care more about dependability and safety.

Man Reading Papers with Tablet

Auto Indifference 

The last type are auto indifferent. They just buy what seems right at the time because of advertising, proximity of the dealer and features that appeal to them. They might do a little research about brands or models. Some auto dealers salivate when they see buyers like this coming. They’ll use features and glitter to sell. Fear also sells, so they’ll tout their latest safety innovations and new-car dependability against stories of on-the-road breakdowns. Auto-indifferent types on a small budget should take a practical buyer with them when they go car shopping, or they might end up leasing a more expensive model.

Leasing paperwork is very complex; you won’t understand it without the proverbial Philadelphia lawyer. Leasing only charges you for the portion of the car you use. For example, a three-year plan’s payment is based upon the depreciated car’s value at the end of the lease. Autos typically lose almost half their value in three years. Oversimplified, if you lease a $40,000 car and it is worth $20,000 at the end of the lease, the monthly payment is $20,000 divided by 36 months. Down payments make the monthly amount smaller, but loan interest increases it. Other factors are depreciation rates, mileage allowance and penalties, dealer profit and incentives.

Half of all premium upscale vehicles are sold through leasing. Image-conscious buyers, or those who like to drive new cars, typically haven’t saved for a good-size down payment or don’t want to invade their investments. A lot of the time, they simply couldn’t afford to buy these models. However, if they can swing the payment, they’re happy. They don’t care about the high long-term maintenance costs typical of these models since they won’t own it long enough for the warranty to run out.

Wise buyers know that long-term ownership and financing cars they can afford to maintain will mean more wealth in their pockets. Mathematically speaking, buying is always the lowest cost way to go, if you don’t buy too much car and buy the more dependable brands.

Saving for the Future

Many middle-class people who survived the Great Recession are learning to eliminate debt and save for purchases and retirement as they practice financial wisdom. Smart vehicle buying is crucial here so transportation expenses don’t consume limited resources.

Therefore, leasing usually isn’t the preferred way to go. However, there are a few exceptions. If you have no other option, I might give the nod to leasing but only if the lease deal is fantastic. This is crucial because in all other instances, leasing is done at maximum profit to the manufacturer.

Great lease deals are defined as those with $0 down payments and very low monthly payments on a modest model. Manufacturers subsidize these super leases to move a backlog of inventory, to sell last year’s models or to achieve sales goals to publicize more sales versus their competitor.

Buyer beware: watch out for low mileage limits and high penalties. Secondly, beware of the bait-and-switch. Don’t be lured to the dealer showroom through an ad campaign touting low monthly payments but then get hooked into a more expensive upgraded model. Worse yet, you’ll see the dream car you must have shining under showroom lights, and before you know it, you have a high lease payment instead of the super cheap deal.

Kent Irwin of Gahanna, Ohio, holds the designations of chartered financial consultant and chartered life underwriter.