The limited supply of new and used vehicles, along with other economic factors, has driven up prices in the auto market. The average price of new cars increased by 13% for the year ending November 30, 2021, according to auto industry survey sources. Kelley Blue Book reports that the biggest jumps in new car prices were seen among so-called “affordable” vehicles.
Buying vs. Leasing a New Car
When evaluating the pros and cons of buying a new vehicle, consider whether it makes more sense to purchase the vehicle or to lease it.
Perhaps the biggest advantage of buying, particularly if you intend to own the vehicle for a relatively long period of time, is that it’s generally less expensive than leasing it over the long run. And, after you’ve paid off any loans, you own the vehicle outright. You can sell it or trade it in on a new car down the road.
But there’s one major downside to owning your vehicle: You’re on the hook for all maintenance and repair costs. This can be expensive if you happen to buy a lemon and the costs aren’t covered by the manufacturer’s warranty — or the vehicle’s problems surface after the warranty has expired.
On the flip side, a lease will cover most repairs and maintenance costs. Plus, your down payment and monthly lease payment will usually be significantly lower than what you’d pay when you purchase a vehicle.
The reason lease payments are generally lower than loan payments is that at the end of the lease term (typically three years) you return the car to the leasing company. You’ve just been renting it — although most lease contracts allow you to buy the vehicle at the end of the lease term at a contracted price. But beware, if you put more wear and tear on the vehicle than your lease contract allows, dollar amounts specified in the contract will be either charged to you or deducted from any down payment.
Another upside to leasing is avoiding some of the hassles associated with buying and selling cars. With a lease, at the end of the term, you just return the car. There’s no added pressure of negotiating a trade-in price. Instead, you can just sign up for another lease or purchase a replacement vehicle.
Even more surprising is the fact that the average price of used cars jumped 28% for the year ending November 30, 2021. Under these conditions, buying a used car may not be a prudent choice once you factor in maintenance, repairs, and financing costs.
If you’re currently in the market to purchase a new or used car, you should look beyond the vehicle’s brand and aesthetic appeal. There are also important financial considerations to factor into your decision.
Many people prefer new vehicles overused ones. In addition to the emotional benefit some buyers experience, new cars provide:
- The option to customize your vehicle with specific features,
- The latest advances in-car technology, including Bluetooth and wireless connectivity and connected mobile apps,
- Safety and eco-friendly features, and
- A full factory warranty and possibly some “free” maintenance benefits from the dealership.
Plus, new vehicles can be financed at preferred interest rates — or leased.
Buying “Nearly New”
Used vehicles don’t necessarily have to be clunkers. Many are gently used, perhaps as demo vehicles or former lease vehicles. Car and Driver magazine refers to vehicles that have been operated for only a year or two as “nearly new.” These vehicles may be a practical option if you’re debating whether to buy new or used ones.
On the upside, a nearly new car will likely save you a bundle over buying new. Generally, those savings will be disproportionate to the physical depreciation of the vehicle. That’s because some buyers place a psychological premium on owning a new vehicle. Plus, if there’s a major problem with a nearly new car, you’d still be covered by the manufacturer’s warranty for two years or so. And some dealers will add an extended warranty to certified pre-owned vehicles.
A major downside to buying nearly new is cost. The shortage of new vehicles has driven up demand for nearly new cars. In addition to the price spike, you could have a hard time finding a pre-owned vehicle with the features that you want.
Also, if you’re financing your purchase, interest rates for used vehicle loans are generally higher than the rates for new ones. Even so, your actual monthly payment might be lower, depending on the specifics of the deal and your credit score.
Financing Your Purchase
Some buyers have cash on hand to buy a vehicle outright. But many opt to finance their purchases, especially given today’s low-interest rates and interest-free loan programs offered by many manufacturers on new vehicles.
To qualify for a favorable rate, you’ll need to make a down payment typically ranging between 10% and 20% of the vehicle’s cost. That translates to between $4,000 and $8,000 for a $40,000 vehicle. Proceeds from trading in your old vehicle may be used toward a down payment.
The decision of whether to pay cash or finance your purchase, boils down to 1) how much down payment you can afford, 2) the interest rate, and 3) whether you could gain a greater financial benefit from using that money in another way, such as paying down other loans that charge a higher interest rate.
Navigating the Options
Mapping out the financial dimensions of auto ownership can be complicated, particularly as it relates to other pieces of your personal finances. If you use a personal vehicle for business purposes, there are taxes and other factors to consider. Consult your financial advisor to help arrive at the optimal decision for your situation.