Posted on Thursday October 19, 2017

Your first new car: should you lease or should you buy?

You're about to get a car? Congratulations! But will you lease or will you buy? Here are some things to consider that will help you make the best choice, for now? and for years down the road.

Make a comparison of your potential instalment payments.

Many people choose to lease because it tends to entail smaller instalment payments than those incurred by taking out a loan. If you have a limited budget, this may be what works for you. But if you're planning to buy your car upon the expiration of your lease, renting may turn out to cost more. It's easy to do the math.

To determine the cost involved in a rental, add up:

• the total amount of your instalment payments for the duration of your lease;
• the depreciated value of the vehicle at the end of your lease (this is the amount you would have to spend in order to buy the vehicle upon termination of your lease);
• the cost of credit, if you take out a loan in order to finance the depreciated value.

Example:

A loan of $10,000 at a rate of 6.25% will cost you $1, 328 in interest over 48 months. The rate is important; be sure to negotiate it. But keep in mind that a difference of 0.5% will only save you around $2.50 a month. In this case, you're well-advised to opt for the service rather than the rate.

Compare the obtained amount to the costs that would be incurred by purchasing the same model, such as:

• the down payment. This isn't always required. But when it is, it's possible to procure it through a line of credit or by putting it on a credit card. That being said, it's important to keep in mind the interest rates involved in using credit.
• the number of instalment payments required to pay back your loan. The longer the time period, the smaller the monthly payments will be; but also, the longer the time period, the more interest you'll end up paying.

Example:

The financing for a $20,000 vehicle over 48 months will cost you $1,245 in interest with a monthly payment of $442 (based on a rate of 2.99% per month.) Spread over 96 months (8 years) the monthly cost will drop to $234. However, you'll be paying $2500 in interest. Financial institutions will suggest that you spread the repayment of your loan over longer periods. It's easy to understand why! But think about it: what condition will your vehicle be in at the end of 8 years? Will you be in a position to re-sell without having to invest hefty sums for repairs?

If you like change: consider renting.

If you want to change your vehicle frequently, renting may be advantageous, because it eliminates the worries entailed in selling a vehicle (such as: placing an ad, having to meet with potential buyers, negotiations, etc.) Renting means you'll always be driving a practically new vehicle on which you agree to make regular monthly payments.

When you are the owner of the vehicle, once you've paid back your loan, you've no further payments to make. You can put the money you've saved to some other use or begin accumulating a sizeable down payment toward the acquisition of your next vehicle.

Wear and tear and mileage: always a consideration

If you plan on doing a lot of driving, give serious thought to what this will entail in terms of wear and tear. Most rental agreements call for a limit on annual use, usually of 20,000 kilometers. This may be negotiable, but, in the long run, you'll see your payments go up.

Moreover, you must return your vehicle in a condition of normal wear and tear; the criteria vary from one dealer to the next. If your vehicle is badly damaged, you may be asked to cover the cost of the damages.

Depreciation: it's a given.

It's common knowledge that all cars begin to depreciate the moment they leave the dealer's lot. If you opt for purchase, you will fully assume the loss of value of your vehicle as well as a certain part of the liability, in case of an accident, for example. If you opt for rental, you won't have to worry about any of this. All you need to do is return the vehicle to the dealer upon termination of your lease.

To evaluate the loss due to depreciation, subtract the resale value of the vehicle from the price paid for it when new. Then divide this amount by the number of years for which you expect to keep the car.

Example:

Let's suppose you purchase a vehicle for $35,000, which you then resell for $15,000 after 5 years. It will have lost $20,000 of its value, or close to $4,000 annually. Some estimates even have a new car losing up to 50% of its value over the first three years. And after that? Up to 10% annually. That's not just loose change!

Alternatives to consider.

A vehicle is like a dwelling. It can be shared. Why not partner with 2 or 3 other people to share the vehicle costs? Just make sure you're well versed on the rules concerning vehicle sharing and that you plan on an annual budget of 5 to 8% of the vehicle's value to go towards its upkeep. Not only will you save money, but the planet will thank you. Happy driving!