Introduction to Automobiles
Buying a vehicle can be a very exciting purchase. A vehicle is more than a means of transportation. It can be a style statement as well as a source of enjoyment and relaxation. What most people fail to realize, however, is that regardless of how stylish or fun vehicles may be, they are generally terrible investments. The moment you take a new vehicle off the lot, its value plummets precipitously. Most vehicles will continue to depreciate (lose value) regularly for as long as you own them. After only 4 to 5 years, most vehicles are worth less than half of what you paid for them new. There are a few types of vehicles out there that are collectible and which do retain value, but these vehicles are generally few and far between. From a value-oriented financial point of view, the best approach to vehicle ownership is to purchase a used vehicle; one that is 4 to 5 years old. The rate of depreciation lessens at this point, yet the need for repairs and maintenance is reasonable.
Owning a used vehicle is not for everyone no matter how smart that strategy may be. Some people cannot afford to spend the time or money getting a vehicle fixed when it inevitably breaks down. Such people will be better served by buying or leasing a new vehicle, which can be expected to be more reliable than an older used vehicle. Additionally, many new vehicle manufacturers offer rebates and other incentives to buy their options. These fringe benefits can make a very strong case for buying new, depending on your needs and financial situation.
Buying vs Leasing
There are two basic ways you can purchase a new vehicle. You can either buy it outright (by paying cash or by taking out a loan from the bank), or you can lease it. Leased vehicle are like rented apartments. You do not own a leased vehicle, but you gain the right to use it within the terms of your lease contract. Generally, contracts allow you to use a vehicle for a set number of months and up to a set number of cumulative miles.
There are a number of issues to consider when deciding whether to buy or lease a vehicle. Leasing a vehicle allows you to get a new car every few years, so you will not have to worry about repairs. Lease rates, however, are determined by the vehicle's projected residual value (the expected value of the vehicle at the end of the lease). The more the vehicle is expected to be worth at the end of the lease, the smaller your lease rate monthly payments will be. If the vehicle is worth less than projected when you initially leased the vehicle (for instance, if you turn the car in at the end of the lease period with more miles driven on it than you contracted for), you may owe the leasing company money. Leased vehicle are almost always limited to a certain amount of mileage per year. If you exceed the agreed annual mileage, there will be fees when you return the vehicle.
So, although leasing allows you to always drive a new vehicle, the costs can be very high for this privilage. Sometimes it is worth it to pay a little extra to own the vehicle outright. For the average person, the costs of leasing outweigh the benefits of leasing and leasing is a bad idea. If you plan on keeping a vehicle for 5 years or more, buying it outright makes more sense than leasing it. However, if you are the sort of person who gets a new vehicle every few years anyway, leasing may be a better option.
Another issue to consider is the cost of ownership. You are responsible for maintenance and repairs on both purchased and leased vehicles unless your deal includes a maintenance contract or warranty. If a major repair is required, you will be stuck with the bill unless it is covered under maintenance contract or under the manufacturer's warranty. Repairs on a leased vehicle, however, benefit the leasing company in the long run, not you, because you will be paying for repairs on a vehicle that you do not own.
Another cost issue that affects the buy-versus-lease decision is the fact that many people will lease a more expensive vehicle than they would be able to afford if they had to get a loan to purchase it outright. In this instance, any monthly savings derived from leasing is for nothing; you are simply paying to rent a vehicle you cannot otherwise afford. From a smart value-oriented point of view, you should not lease a vehicle that you could not afford to buy. Leasing a vehicle you can't afford to buy is a pretty clear indication that you are overextending yourself financially.