October 15, 2016
Leasing or Buying a Car..Which Is Best?
I will admit, this is a post designed to help me. Even so, I imagine there plenty of folks who wonder the same thing when it is time to trade in that old clunker that is smoking up the neighborhood. Betty and I are close to such a decision and I am torn.
I have always purchased, not leased, my cars. I will buy used but only if less than 2 years old. I usually pay cash to avoid the monthly payments. That is especially true on a depreciating asset like an automobile that loses 25% in value the moment it leaves the dealer's lot. I get the best deal I can, write a check and am done with it. If we spill something, or the dog has an accident, we clean it up and forget it. When some less-than-considerate driver dings the door in the parking lot, I shrug it off.
With a lease I have to pay a few thousand dollars in cash upfront, and make regular payments for the use of the car, normally for 3 years. At the end of that time, I turn the car in, pay for any excessive mileage or wear and tear, and walk away with nothing to show for the money I have spend over that period. In essence, I am renting the car. But, I am not paying for depreciation.
So, why would I consider a lease when the money buys me nothing of lasting value? There are three key reasons:
1. If I purchase a car I will be spending somewhere around $20,000. That money will come from an IRA account, thus triggering taxes on that amount. On top of money withdrawn to live on, that extra income will push us into a higher tax bracket. With monthly lease payments I do not have to withdraw all that cash at once and trigger tax consequences.
2. At the moment Betty and I have different enough schedules that two cars are almost essential to keep the peace. We could live with one (obviously), but there would be some major compromising. So, replacing the 13 year old automobile with mounting problems is a requirement.
3. At the end of a 3 year lease, we may be in the place where one car is just fine. I wouldn't own a car that would have to be sold privately to recoup maybe 40% of the purchase price.
You may argue that I could buy a car for little money down and monthly payments spread over 4 or 5 years. They would be higher than the lease payments but not unworkable. Of course, I would end up paying money in interest charges, but at today's rates it wouldn't be a lot.
So, it comes down to owning something that would result in the loss of a substantial chunk of ready cash and trigger tax costs, or "borrowing" a car for less money but with no value at the end of the lease.
What are your thoughts?