Buying or Leasing a Car

Buying a New Car: The Basics

Cars are probably one of the few negotiables left in the Western World. The sticker price is not final; the dealer can always reduce it or add in extras to sweeten the deal. (Just make sure these extras are things you actually want.) Car dealers work on commission and moving inventory, and you’re working on your budget. Remember, this is a price war: walking away hurts them more than it hurts you. Unless you live in the middle of nowhere, you have options.
Research different makes and models online and check out safety ratings, reviews, and gas mileage.
Once you have narrowed down your search to just a few models, compare prices online and at different dealers near you. Kelley Blue Book offers tools to compute the fair purchase price of new cars based on model, make, and different features.
Make sure you take the car for a test drive on both highway and non-highway road conditions (if possible). Check for things like:
- the pick-up on the highway ramp
- the ease of steering, braking, and turning
- the comfort of the seats
- leg room in the front and back seat
- ease of parking
- noise on the highway with the windows closed
This is the time to get a feel for the car. Can you picture yourself driving this vehicle?
Was the car a demo or dealer’s model? If so, the mileage will be higher and the price should reflect that.
When you figure out your budget, don’t forget to account for any trade-in value of your current vehicle (if you own a car that you will be trading in). Also, check out Kelley Blue Book trade-in values before you go to the dealer.
How close is the nearest repair/authorized dealer? If it’s far, chances are, that tune-up/oil change that you may be prepaying for is not going to get used a lot. Don’t let them sell you these attractive maintenance plans if you think using that service is more of a pain than paying a bit more for a local repair shop. Also, see what maintenance is already covered under your warranty.

Buy vs. Lease

This is both a personal and financial question. If you buy the car, it will become an asset that you can sell or trade in later. The monthly payments will be higher, especially if you don’t make a significant down payment, but at the end of the day, it’s yours. If your trade-in value is high and you can afford the monthly payments, then this option is something to look into. If you expect to keep the car more than the length of any financing, then you can benefit from driving your car for a number of years without having to make any car payments. Your wallet will thank you for that hiatus.

The other side of the argument is that a lease has lower monthly payments, but once the term is up, you will return the car to the dealer. If you always like to drive a new or new-ish car that will hopefully have fewer maintenance headaches and will typically be under warranty, and you are willing to always be making a car payment, then leasing may be something to consider. Leases will come with a pre-set mileage amount, and you will technically pay extra if you return the car over mileage. (Some dealers may waive the overage if you lease or buy another vehicle from them.) You may also have to pay for certain dents and other problems when you return the car, depending on the extent of the damage.

From a budgeting perspective, you should compare the cost of leasing vs. buying, factoring in the number of years you expect to keep the car and your mileage patterns. Buying a car is usually less expensive over the long term, but your unique situation needs to be considered.

New vs. Used

You’ve probably heard that after driving your new car off the dealer’s lot, you’ve just lost 10% of the car’s value. While this may be an exaggeration, resale values may decrease by 20% or more after the first year of owning the car. And keep in mind that different makes and models will depreciate at different rates, depending on market demand for any particular car and other factors. So the trade-off is that with a new car, you have the latest model, you hopefully have a good warranty…but you are paying a premium for that new car.

With a used car, you won’t really know how the car has been maintained or what costly repairs might be needed soon, but you are taking off the depreciation premium. This is a both a personal and an economic decision. You should consult resources like Craigslist, Kelley Blue Book, and various other sites to help you assess the fair market value. As with any new car purchase, you should take the used car for a test drive on both highway and non-highway road conditions. And make sure you have the car inspected by a reputable mechanic (or two) and/or certified by a reputable dealer. Never take someone’s word for anything, even an authorized dealer.

Getting a Loan

You need to know the length of any financing and the interest rate. Your dealer will likely be able to offer financing, sometimes with very attractive rates through seasonal or other dealer incentives. However, there are many other financing options. Your bank, for instance, may offer a competitive rate. Also, don’t forget about marketplace lending, where consumers and businesses will fund your loan. Some examples include: