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Driving Smart: A 101 on Buying vs. Leasing a New Car

interior photo of cars for sales

Are you wondering whether to buy or lease your next car? This article examines many of the nuances included when considering a new vehicle. 

When weighing the pros and cons of financing options for big purchases, it’s critical to make the best decision for your financial future. A common ‘bigger purchase’ is that of a vehicle. Have you ever found yourself wondering what’s smarter in terms of buying or leasing a new car? 

Today, we’re exploring the nuances of buying versus leasing, financing versus cash, and the considerations between premium and non-premium cars.

Buying vs. Leasing: The Long-Term Perspective

No doubt about it: leasing can be cheaper upfront and ensure you’re always driving a newer vehicle. But when contemplating the decision to buy or lease a new car, you should consider your long-term plans and financial goals. 

Generally, purchasing becomes the more financially prudent option if you intend to keep a vehicle for longer than 5 to 7 years. While leasing does offer lower monthly payments and the allure of driving a new car every few years, the cumulative costs over an extended period often surpass that of buying. Additionally, leasing agreements typically come with restrictions, most notably regarding mileage. Exceeding the allotted mileage can result in substantial fees at the end of the lease term. For individuals with unpredictable driving habits or those who foresee significant mileage, purchasing provides greater flexibility and peace of mind.

Financing vs. Cash: Assessing Interest Rates and Investment Returns

There are a few pros and cons to buying a car with cash (with a heavier emphasis in the “pro” column), but ultimately, the decision hinges on interest rates and expected investment returns. As a rule of thumb, if the interest rate on financing exceeds the estimated long-term portfolio return, opting to pay with cash is the wiser choice. This guideline, typically around 5-6%, ensures that your financial resources are allocated optimally.

By paying with cash, you eliminate interest payments and the burden of monthly loan obligations, which factor positively for your financial stability. Additionally, avoiding debt associated with car loans can enhance your creditworthiness and provide greater flexibility for future financial endeavors.

Premium vs. Non-Premium Cars: Balancing Luxury and Practicality

The debate between premium and non-premium cars often revolves around luxury versus practicality and cost-effectiveness. Premium vehicles typically offer advanced features, superior craftsmanship, and even other perks, such as Volvo’s overseas delivery program. However, they are accompanied by a higher price tag and increased maintenance expenses. Non-premium cars, on the other hand, provide reliability, affordability, and lower ownership costs.

How to Choose a Car for Work Purposes

When considering using the car for work, especially if you own a business, it’s essential to be mindful of the type of vehicle that’s allowed for tax deductions. According to IRS guidelines, certain vehicles, particularly those used exclusively for business purposes, may qualify for favorable tax treatment. In such cases, leasing a car could be advantageous due to its tax-deductible nature, allowing you to offset a portion of the lease payments against your taxable income. Additionally, premium cars may make more sense for business use, as they often come with higher depreciation limits and can offer enhanced tax benefits. 

Additional considerations

In the pro column, purchasing a luxury vehicle might be well within your reach. Also, many folks choose a fancy car as a reward for hard work. If you plan to spend a lot of time in your vehicle, it can be worth the extra money to choose one with features you enjoy. Another point to consider is that if you are professionally associated with your car (i.e., give rides to clients or use your vehicle for business), it can help influence how you are viewed. 

For the con column: Just like the price tag or lease payments, insurance costs for a luxury vehicle can be significantly higher than the cost to insure a standard car. Another factor to consider is luxury cars have more expensive and specialized parts, so (repairs and labor) can cost more.

Conclusion: Choose a Car that Checks All Your Boxes

The decision to buy or lease a new car, finance versus cash, and choosing between premium and non-premium models necessitates careful consideration and financial foresight. You know your reasons for purchasing a new vehicle and ideally, you know how it will affect your finances (if not, may we suggest a conversation with your financial advisor). 

Ultimately, the key is to make a decision that enhances your financial stability and aligns with your long-term goals. With the right guidance and mindset, purchasing a new car can be a rewarding and financially savvy endeavor.

As financial advisors, we use a holistic approach to help clients make informed decisions that align with their objectives and aspirations—including the buying (or leasing) of new cars and other vehicles. Want to learn how these kinds of purchases fit into your long-term planning? Schedule a meeting today. 

 

The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.

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