The automotive market has seen massive volatility in recent years for several reasons, including the pandemic recovery, Russia’s invasion of Ukraine, the growth of the electronic vehicle market, and the unpredictability of metal prices, to name a few. Financial planners often field questions about whether clients should purchase a vehicle by taking out a loan or lease the vehicle if they can’t pay cash. Here are the implications of each scenario:

Owning a car

Buying a car is straightforward. You either pay the full amount in cash or take out a loan, most often for a three- to five-year term. About 80% of those getting a new car choose to buy instead of lease. Buyers who pay cash receive the title immediately, while those who take out a loan receive the title after they make their last loan payment. Buyers have no mileage restrictions or restrictions on their ability to change the vehicle’s appearance. In addition, they could qualify for a tax deduction if they use the vehicle for business reasons. New cars can depreciate as much as 20% in the first year and about 40% after five years; therefore, you should consider your vehicle a “use” item rather than a long-term investment. You should also consider maintenance costs, which can be hefty. Finally, when it’s time to get rid of it, you’ll need to choose whether to sell outright, trade it for your next vehicle, or drive it until it is unfixable.

Leasing a car

Leasing a vehicle involves different rules. When you opt to lease, you agree to pay a dealership for the right to drive the vehicle for an agreed upon amount of time, normally 24 or 36 months. People who choose to lease often want to drive a luxury car without the expense of a down payment or higher loan installments. Lessees also experience limits on their mileage, which may range between 10,000 to 15,000 miles per year. When the lease ends, you have the choice of returning the vehicle to the dealership or buying it outright at an amount outlined in the lease. One disadvantage of leasing is that the dealer owns the vehicle, so you don’t have an opportunity to build equity. Also, if you end the lease early, you will likely pay a termination or cancellation fee, and you won’t know all the costs until the lease is up. Think of it as a long-term rental from a dealership in which you must supply your own insurance, and you may choose to purchase the vehicle at the end of the lease rather than returning it to the lot.

Which road (pun intended) is best? Like many financial decisions, the answer is not clear cut. If you are not interested in high monthly costs, enjoy modern technology, and not amenable to paying maintenance costs or selling your car, then leasing may make sense. If you want full control of the vehicle via ownership and are comfortable trading or finding a buyer when the time comes to sell, it probably makes sense to buy. Of the two options, most financial planners would suggest buying; however, it may be beneficial to have a conversation with a trusted professional before making this decision as part of your overall financial plan.

This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique situation.

Author Jonathon D. Merickel Portfolio Advisor

Jonathon has been involved in the financial services industry since 2002. He earned a bachelor of science degree from Syracuse University and an MBA from Le Moyne College.

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