Nothing gets people more excited than debating whether you should buy something or rent it. Unless you’re talking politics or religion then it really gets crazy. The topic today is not whether you should buy a new car or buy a used car. No, I’m talking about leasing a new car vs buying a new car. Forget used cars that’s for another day.
We own two vehicles at the moment, one we bought with my wife’s employee discount at the time (great value) and we lease a 2014 Kia Soul which is up in May of this year. I firmly believe if you want to continue to drive a new vehicle, which I do, then leasing your ride over buying is the superior option.
You don’t need to BUY a car to have one.
A new vehicle loses 10% of it’s value the moment you finish downing your awful dealer coffee. It continues to depreciate 10% a year for the first 3 years you own it.
According to J.D. Power and Associates here in Canada, the average car loan is extended out over 69 months. That’s a long time. Resident car guru guy here in Canada is Denis Desrosiers and he says it takes 80 months of payments to get back in the black on a new purchase. So, with that in mind it’s worth zero and you probably don’t even own it. It’s probably turned to junk in 71/2 years. I laugh at people when they tell me they bought it as an investment. News flash- new cars are not an investment. Buying a house is an investment. Buying stock in your local bank is an investment. Upgrading your education is an investment. Buying a new car is NOT.
Most people have a penchant for buying cars they can’t afford. Rates are cheap and financing is easy so they ignore the fact that while they dole out the monthly, the car is depreciating to zero.
I have a simple rule I’ve been following my whole life, BUY what appreciates and LEASE/RENT what depreciates.
The Cons of Buying New
- loses a third of it’s value as soon as you drive away
- this is NOT an asset
- costs more than leasing through a dealer
- they break, wear out and get recalled
- no equity is built up on spending this money
- will be worth close to nothing on a trade-in
- never pay cash, you’re throwing good money at a machine that breaks
The Pros of Leasing
- you rent out the best years of the car (first 3 years)
- you virtually drive maintenance free for 3 years
- the car has value when you turn it back in
- you are warrantied and free to upgrade in less time
- never have to waste your precious time waiting for repairs because there is none
- leasing costs more over time but you’ve owned and driven many more new cars
- stay up to date with technology when you lease every 3 years
How To Make It Work
- put no money down
- keep upgrades to a minimum
- finance only what you can afford (just like if you purchased)
- visit multiple dealers for incentives
A lot of people I know end up taking money out of their investment accounts to buy cars. Nothing could be more crazier to do than that. You’re making 6-7% on this money so you withdraw it to purchase something that loses what’s equivalent to 18% a year. Besides that, The dealer is lending you money on the financing for less than 2%. This is a great way to squander money.
If you are buying a new car through a dealership you are paying more money than you did than if you leased it. You will face some restrictions on how many miles you can drive in a year but to me these are more than offset by the ability to always be driving a new car.
Invest the Money and Why?
For me this is an easy decision and why I keep turning over my lease into a new ride. I do get why most people struggle with this here in Canada especially my friends and family. This is not about purchasing a used klunker 10-15 years old or buying something new with cash and driving it into the ground to save money on the high monthly cost of leasing. That new car eventually has a value of zero.
It would only make sense for you to lease a car if you take that savings and invest it. Take the 10K down payment you would put on a new ride and invest it instead. After 30 years that would end up turning into 66K. If it’s invested in your tax free savings account you can withdraw it later for free.
The other upside to the investing part is if you achieved at least a 7% average annual return on that money you would have close to $400 a month in income until you die. If you spent 20 years in retirement that works out to $96,000 and you still have the original 66K left. That’s a $162,000 reason why leasing is a better option than buying.
Keep your money invested and go to the dealer and lease that new car.
This post is not about being frugal and saving the planet from your carbon footprint. You could just buy a bike and walk in the winter, where’s the fun in that. For my money and I like to drive new, leasing is definitely the way to go.
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