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Buy it or Lease it - What to Do When You Need to Replace Your Car

I thought I’d write about this topic because I just had to return my leased car and I get questions about this pretty frequently. Generally, when it comes to cars, I have 3 rules, from a financial perspective:

  1. Only buy used (one to 4 years used) and keep it for at least 10 years
  2. If you want a new car, consider leasing it, but only if you can control the miles/mess
  3. Try not to ever buy new, and if you do, keep it for at least 10-15 years

Rule #1 has two parts: 1) buy used and 2) keep it for 10+ years. Buy used because you do not want to pay for the depreciation that happens immediately after taking ownership. You want to avoid a situation where you OWE MORE THAN ITS WORTH (also called being "upside down") , which is easy to do nowadays when cars are so expensive and we still use 3-5 year loan terms.

Years ago, when a car cost $10k, 3-5 years of payments were fine and you might be upside down for 6-12 months. Now, a car costs $35k and is therefore upside down for half of payment period due to the still relatively short term of the loan. Think about it, your grandparents' house might have cost what your luxury SUV costs now and they had 15 or 30 years to pay it off. Buying used should allow you to avoid being upside down on the car or at least it will minimize this period.

The second part of rule #1 should be obvious. The longer you keep it, the longer you do NOT have a car payment and therefore have more cash flow for other things like paying for college. The natural question after my recommendation to keep the car for at least 10 years is “what happens when things start to break?” I’m going to say it and deep your heart you know its true: ITS ALWAYS CHEAPER TO FIX AN OLD CAR RATHER THAN REPLACE IT. As long as professional mechanic confirms the car is safe, it is cheaper to fix it. Do not BUY a car if you cannot stomach when small/medium things start to break at 5-10 years of age.

Rule #2: In the last 5 years or so, I’ve been telling clients that safety and environmental technology seems to be changing overnight. It’s reasonable to not want to keep a car for 10+ years when your family could be safer with the newest gadget. As such, leasing could be a good option. You should only lease if you can always manage a car payment each month and can keep miles and wear and tear under control. Leases are a big commitment and you will always have a car payment. Note: there is no reliable way to get out of a lease. Not even death in some cases. Do not sign a lease without thinking all this through.

Lastly, should you ever buy out your lease? Usually never. The only time it COULD make sense to buy it out is if the leasing company got it wrong and the car is actually worth MORE than its buyout price at the end. It’s rare. You may need to buy it out if the car is a mess by the end, to avoid huge penalties. Otherwise, assume you are turning it back in and therefore you need to keep it in good shape and make sure your cash flow can always handle a car payment.

Remember these 3 things when it comes to cars:

  • BUY AND KEEP FOR A LONG TIME
  • LEASE, BE GENTLE, and EXPECT TO ALWAYS HAVE A PAYMENT
  • AVOID BUYING NEW UNLESS YOU WILL KEEP IT FOR 10-15 YEARS

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