Buying or investing in your first car is a huge decision. There is the attractiveness of lower monthly payments when leasing, but the security of owning an asset when you buy. In recent years, leasing has been more popular as millennials are looking to have more cash on hand, but this may not always be the best decision for everyone. Here are a few things to consider when financial planning for buying a car.
Up-Front Costs
In both scenarios, the down payment for a car can be high, depending on several factors, including your credit score. The more expensive the vehicle, the more down payment you will need to put towards maintaining low monthly payments on the lease or credit. Buying a used car or older model can help you save on the up-front costs of a vehicle. Used vehicles and older models can be something to consider, especially if you’re looking for something that is merely practical and functional rather than flashy and new.
Monthly Payments
Leasing almost always results in lower monthly payments, which can help save money in your current budget. Rather than paying for the full value of the car, you only pay for the difference in the depreciation. However, one must keep in mind that you are dishing out cash every month for an item that you won’t eventually own (if you don’t plan on buying out the car at the end of the lease).
Ownership & Customization
There is the obvious advantage of owning your car once you buy it. Depending on your outlook, you may view selling or upgrading the car later on as a hassle or an advantage. You will gain the residual value of the vehicle if you decide to sell it, which typically makes owning a car a lesser overall investment.
Owning your car also means that you are free to make modifications and customize the vehicle at your will. When you lease a vehicle, you must return it in salable condition and are responsible for any residual damage.
Car Repairs, Mileage & Wear and Tear
Under a lease, your car is likely to be under warranty; however, you may still need to pay for maintenance and repairs. Also, you may be required to replace worn items like tires and windows before returning the car at the end of your lease.
If you decide to purchase your car, remember to keep some money aside for regular maintenance and emergency fixes. Emergency vehicle funds are especially important if you are putting considerable mileage on the car or often drive in congested areas where you may be likely to get bumps and scratches on the vehicle.
As a car owner, the more miles you drive on the car, the faster it will depreciate. Consider depreciation if you are looking to gain back some money from the resale value of the vehicle.
Flexibility & Early Termination
It is extremely costly to buy new car models every few years consistently. Leasing might be ideal if you want to be able to continuously trade-in for a new, recent model.
However, you must be committed to the terms of the lease. Breaking the contract can cause you to incur severe penalties, which can be detrimental to your overall financial planning. In some cases, individuals who cut their leases are responsible for paying all remaining lease payments, plus additional penalties and fees.
When you own your car, you can get rid of it and upgrade at any time that’s convenient for you without incurring fees and penalties.
Think about how often you will want a new car. If you can stick with a model for some time, then buying may be your best bet.
There are many things to consider when financial planning for buying a car. The most important part is doing proper financial planning to ensure you prepare for your down payment, monthly payments, and maintenance. If you’re ready to create a savings plan to better prepare for your future, check out Finally.
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