When considering a new car my customers often ask, “What is the best deal?  Should I Pay Cash, Finance of Lease my new car?” The answers become clearer when you begin to focus on your personality, lifestyle and budget.  To find the best fit, begin by understanding the mechanics of your three options.

The First Option: CASH is simplest.

• You can pay a cash lump sum up front, owning the vehicle outright.
• Being the easiest path to ownership, you also assume the highest risk.
• Depreciation is one the largest vehicle ownership expenses. As owner, you are assuming this depreciation risk.
• You also risk the opportunity cost of money used to purchase the vehicle. In other words, what interest could have been earned on the money used for the purchase?
• It could actually cost more to own the vehicle overall, depending on your rate of return and depreciation.

The Second Option: Financing

• If you like to keep your vehicle as long as possible, buying is probably better for you.
• The biggest benefits that buying has over leasing is there are no mileage restrictions, wear and tear charges, early termination or disposition fees.
• When you finance a new car, as with purchasing with cash you roll the dice with its resale value.
• Another drawback of buying is the large down payment for similar lease payment.
• Financing may entail stretching out the length of the loan to fit your budget.

The Third Option: Leasing

• Basic lease mechanics. Picture two lines, green and red.  Green represents the Selling Price, the Red represent the Residual Value (the vehicle value at end of lease term).
• Lease cost is calculated on the spread between the Selling Price (Green) and Residual Value (Red) plus interest and taxes. The lower the selling price or higher the residual the smaller the lease cost (Yellow).  See the graph below.

• Is leasing right for you? Your lifestyle and budget will determine this.  Leasing allows you to drive a luxury vehicle for less of a monthly payment.  You can also drive a brand-new car every two or three years.  These leases can include both maintenance and repair cost for hassle-free driving.  You will not worry about trade values.  You will pay less in sales tax.
• Common Objections:
  • I don’t own the car at the end of the lease. This actually is good.  It takes all the risk out of owning a car.  You are not hurt if resale plummets.  If it remains abnormally high you can actually earn equity in your lease vehicle.
  • My mileage is limited. Be honest and have the lease based on your annual driving mileage.  If you do approach your mileage limit, some manufacturers offer “pull ahead” leases to get you out early before you go over your mileage.  This will vary by brand.
  • Wear-and tear charges can add up. If you own the vehicle these same deductions will devalue your vehicle come trade time.  Wear and tear costs whether you lease or own.

So what should you do?

Consider a lease if:

• You like a new vehicle every 2-3 years.
• You drive between 7,500 – 20,000 miles a year.
• Like the most vehicle for the lowest initial and monthly payment.
• Use the vehicle for business, there may be tax incentives.

Consider a purchase if:

• You plan to own the vehicle for a long time.
• Use any promotional finance rates to determine whether to finance or pay cash.

Whatever is chosen, make sure you understand and are comfortable with your options.  The best deals are found with the best information and knowledge.