Should I lease or buy a car? To finance or lease….that is the question. This is probably the hardest, most basic thing to understand as an adult. Honestly, until recently, I never understood the difference between the two, the benefits or pitfalls. I also didn’t realize how much of a depreciating value a car has. That is, until I fell into the pitfalls myself and had to dig my way out of it. I wish I knew some first time buyer tips so I could have made an educated decision.
Surprisingly neither college nor high school prepared me for these kind of basic and normal financial decisions like should I lease or buy a car. Kind of crazy, right? We’re expected to just know these things when we go to the car salesperson, and if they fail to disclose all the pros and cons then we’re sh*t out of luck when things turn out pricier than we expect. As a teen, I never thought about my parents car payments or what it meant to finance something. A lease didn’t seem like a huge commitment. And since it was on my parents dime, a car really didn’t have a major cost to me.
But oh, did I learn…..
Here is what I learned for my first time car buyer tips :
A car is a forever depreciating asset. It will RARELY ever gain value and only if it’s a collectible. There will always be a cost associated with owning a car whether it’s leasing a new car, financing a new car or maintaining an old car. How much in cost can vary between those three typical options.
What most people want to do is minimize their cost for owning a car as well as the maintenance while still holding value.
When my husband and I got our first car, my father in law insisted that we lease. He had leased 2 of his cars and he and his wife had a total of 4 cars, each with light usage.
So we thought, his dad has a lot of experience and leasing works for him, it should work for us. We were WRONG!
Leasing did not work for us, at the end of the lease we owed $3K in overmileage fees! I knew it was coming but it didn’t make it less painful.
Leases have a set # of mileage that they allow for in the lease term. We signed up for a 36,000 3 year term lease which was a 12,000 per year allotment. This is standard. The issue was that this was our ONLY car, my husband drove this car to and from work every day and then we’d also use it for weekend errands. He didn’t work close either. It takes him an hour to drive to work in NY traffic so the mileage added up. We literally hit our mileage limit around 1.5 years into the lease. Here’s one of my favorite first time buyer tips, don’t sign for a lease until you have researched how far you need to go to work.
What made the lease attractive to us at the time was the low monthly payments. Our lease payments were $220 a month. (Don’t judge me, everything in NY area is stupid expensive including car leases). Financing would have been $400 a month, a price that was a stretch for us. Leases tend to be cheaper than financing.
So short term, the monthly payments were great, but in the end it cost us nearly as much as financing would have anyway.
At the end of the lease the dealership gave us the option to buy the car. This price was negotiated when we initially signed the lease, believing that we were able to keep under the miles restriction. So MSRP was $19,500, the negotiated rate after the lease expired was $13,850. So what we had was a 2017 Honda Civic with 55,000 miles on it. At that point it wasn’t even worth the $13,850 that we would have had to FINANCE at 6.9% APR!
I wouldn’t finance a house at that rate, let alone a car.
So leasing didn’t work for us because we drove it too much. I could definitely see leasing as a practical option for people that don’t drive very far on the regular basis and want to have a nice car for low cost.
People that constantly lease are able to get the best technology, the coolest specs, and the sleekest finishes. Since cars lose the most value in the first 3 years, leasers are able to enjoy the newness of the vehicle without the commitment or cost.
When our lease ended, we considered re-leasing but after our whole over mileage situation I realized it just didn’t make sense. Like I mentioned, they did offer to allow us to to buy out the car but the deal made no sense. With all the initial lease payments, the $13,850 buyout option and the 6.9% APR over the 6 year payment period, overall costs were expected to be closer to $27,000 for what was a severely depreciating asset that had an MSRP of $19,500.
Financing the car we leased seemed like a mistake. So we shopped around at another dealership. For us, it was really utttimportant to get a reasonable deal. We were already $3000 in the hole because of this huhthe over mileage.
We opted for a $22,500 u and hdue to great credit we were able to get a 2.9% APR rate. That’s over 1/2 hthe rate for the lease buyout option! It made more sense to finance a new car with little to huno mileage. The payments are going to be $500 for 5 years. At the end of the 5 uh we expect the car to have some value left. Our hope is that the car will still be well runningu so we can keep it after the payments are done. The 2.9% APR also saves us severauso getting a 5 year, 100K mile warranty on the car so at least then we had a good sense of what the maintenance cost would be at least for the first couple of years.
Long term, financing the new car seemed like a better deal than trying to salvage our 3 year old car by buying it out.
Leaving A Lease And Getting A Totally Different Brand Of Car
We could have considered paying out the end lease fees and overmileage and going with a different car brand other than Honda. But we were sure they wouldn’t be able to waive any of the fees or over mileage and I was concerned that when it came to the maintenance work that needed to be done that we would be over charged for damages.
For us, this option didn’t make sense since we already owed Honda $3000 in over mileage. I mean, the car was in OK shape, but had some dings courtesy of my husband. Those costs would have to come out of pocket now. We estimated total lease end costs to be $4000-5000 depending on what they found in the inspection. Then we’d have to go to another dealership, put down $2000-$4000 down to finance elsewhere. Negotiating in our position was only going to take us so far.
Leaving a lease and getting a totally different car brand seemed too costly for us because it would be a LOT of money up front.
Also staying brand loyal to Honda meant that certain things could be waived like the $900 lease end fee, some of the mileage (we got $400 back), and the upfront payment. We were also able to roll over the $3000 over mileage charges into the finance deal so it wasn’t going to be such a large up front payment.
As you can tell the $3000 over mileage really screwed us over and kept us from being able to take advantage of other options.
Best case scenario.
Personally I believe the best way to buy a car is to buy a used car all cash with no financing. Financing is a huge waste of money because you’re essentially paying interest on a DEPRECIATING ASSET over time at the same price for when it was new and full value.
The issue is that not everyone has a good chunk of cash (more than $10,000) to put down at once. It’s literally probably the best option out there for car owners but, honestly, hard to attain. Most people just don’t have that kind of liquidity and end up just financing out of the necessity of their transportation needs.
So should you or I lease or buy a car? Overall, the car buying experience is very personal and for most people it’s quite pricey. A majority of Americans actually never buy off of a new car dealership, that’s how much of a luxury a new car is. I do feel lucky to be able to share this experience and my findings as someone who had NO IDEA what car buying entailed.
For my Husband and I, we started off on the wrong foot with getting a lease but at least moving forward we’re able to understand the significance of our purchase, how cars can add to your transportation costs, the value we’re getting, and the financial effects of our our decisions. Hopefully these first time car buyer tips keep you from making some of the same mistakes I did.
If you like “Should I Lease Or Buy A Car: First Time Car Buyer Tips” check out my other posts: