Recently, we've had a lot of car talk around the office - mostly about buying or leasing a car. Whether you want a new car or a new-to-you car, here are some scenarios when leasing or buying makes sense.
Leasing makes sense if...
- You are an early adopter - you want a new car with the newest technology every 3 years.
- You drive less than 12,000 miles per year. Leases cap the number of miles you can drive throughout the life of the lease. If you exceed the cap by the end of the lease, you may be assessed penalties on the number of miles you went over your alloted miles.
- You want to avoid costly repairs and keep reliability high. Lease terms usually last 36 months, which is usually the length of the bumper-to-bumper warranty.
- You need more cash available in your monthly cash flow. Typically, leasing a car has lower monthly payments than buying a car, because you're paying for the depreciation up front.
- You drive the car for business. The IRS allows you to deduct a portion of a lease car's depreciation and financing costs if used for business. The IRS does not allow the same deduction for interest on a car loan if you bought the car.
Buying makes sense if...
- You drive more than 10,000-12,000 miles per year (see mileage restrictions above).
- You're into customizing your car. You can make modifications (e.g., new radio, different mud flaps - the choices are unlimited) on a car you own without worrying about breaking the lease terms.
- You're hard on cars. Because you own the car outright, you won't be assessed penalities and fees if your car has more than the normal "wear and tear" after a few years.
- You want flexibility to sell the car at any time. You own the car, so you can sell it at any time to an open market. Trying to get out of a lease early may incur big penalties. When the lease is over, you have to return the car to that car company.
- You typically keep cars for a long time - at least 7 years.
- Most importantly, you want to be free of a car payment. Depending on if you finance a car or buy it outright, you (eventually) won't have a car payment.
Georgia drivers - a word of caution about the ad valorem tax
- If you think you'll lease a car because you'll pay a lower ad valorem tax, think again. For any cars purchased on or after March 1, 2013, the annual "birthday" tax (i.e., sales and use tax) has been replaced by a one-time tax, the title ad valorem tax free (TAVT) that is applied on the fair market value of the car at the time of purchase. The TAVT applies to new or used, leased or outright purchased cars. You can estimate the TAVT using this calculator.
Want to run the numbers? This Auto Calculator considers your credit rating and car maintenance in its assumptions.
Editor's Note: This blog post is part of the September 2017 edition of Odyssey NexGen Newsletter. Curious about Odyssey's NexGen program Email Anne.Simpson@odysseypfa.com to learn more.
Reviewed & approved via C2C by BT 9/15/17