Lease or Buy a Car test

Posted by: Leo Marte, CFP®, MBA | Aug 8 2022

Car ownership (along with owning a home) has been a hallmark of the American dream for a very long time. In this article, we're going to discuss car ownership and whether Christians should consider leasing, borrowing money to purchase a car, or buy your vehicle outright.

Cars by the numbers

In America today, we have over 280 million cars registered. Out of the new vehicles sold every year, roughly 85% of those vehicles are financed through some means. 25% are leased, and the remaining 60% are bought with a loan.

Owning a car with a loan

When you're looking at car ownership through a loan, you have to consider a few things. You will be putting less money upfront to get the vehicle, but you're not going to own that vehicle until you've paid that loan off. One of the things that I like to highlight for people is that you are exchanging the benefit of getting the car for less amount money upfront, but in exchange, you have to give part of your cash flow every month. Depending on how you plan your budget, you may have some situations that prevent you from making that monthly payment.

When your vehicle, the primary means of transportation of getting to work or going to the grocery store, depends on a continuous flow of payments every month that puts your life at risk. Inevitably there will be situations in life where you may not be able to afford the monthly payment for your car anymore, and in that circumstance, you're going to lose twice. First, you're going to lose the vehicle itself. On top of that, your credit report will show that the car was repossessed after late or no payments for an extended period. This will do significant damage to your credibility.

Is leasing a better option?

Some people see leasing as an opportunity to drive recent model cars and change them more often. The leasing experience is very similar to the car loaning experience with a few significant differences:

  1. You don't own the vehicle, so you will need to turn the car at the end of the lease car’s term. Some dealerships incentivize you to purchase that vehicle after the lease is done because you like the car, which saves them the cost of selling it.
  2. Mileage limits are contractually agreed upon, and if you exceed those limits, you will be charged a hefty premium for every mile over your contract. These vehicles are not for everyone - they are typically for people that do not drive that much and in certain exceptional circumstances.
  3. Depreciation is real, and when you buy a car outright or through a loan, you do not have to pay anyone for it. As your vehicle drops down in price over time, you eat that cost, but it's not something that's coming out of your pocket in the form of payment, so most people don't even think about depreciation when they talk about car ownership. When you lease, the owner of that car will expect you to pay the depreciation through your lease payment, which is why owning a car through a lease is almost always more expensive. A bank will not expect you to pay depreciation, but a lease will expect that as part of the packaged deal.
  4. Don’t forget the profit because you are also paying for that in a lease. In the end, these companies are in the business of leasing because it's profitable and because people want to have a shiny, beautiful new car every couple of years. The profit you're going to be paying is embedded in the lease payment.

That's not to say that leases are evil. Leases have their uses in financial services for a variety of reasons. Companies typically use them to reduce the asset management cost of having cars. Companies tend to lease vehicles because they can write off those vehicles’ charges against their taxes, and they don't have to manage the asset of a car on an ongoing basis.

Buying a car outright

Let's talk about owning a car outright (the old-fashioned way!), which has gone the course of the dodo. Purchasing a vehicle is expensive, so we acknowledge that it's not easy to go out and buy a car in cash, especially if you're looking for a relatively recent model that is in excellent condition.

I want to challenge you to think about the cost of owning a car outright vs. the cost of owning a car through other means. Yes, a car lease and a car loan are going to allow you to walk out of the lot with the vehicle with a much less initial cash outlay. If you're not in an economic situation to pay for something like that, those two ways afford you the way to be able to walk out with a vehicle.

However, when you buy a car outright, there are a couple of things that are going to play to your advantage that we think is essential to highlight:

  1. You will have no car payments, which is one of the best advantages of owning that vehicle. You will not be subject to fluctuations in employment or your income that may cause you to lose that car. This is why we are fans of owning cars outright and buying them in cash.
  2. You will not pay interest to the bank to own the car. The cost of interest could be high even though we are in a very low-interest-rate environment. If you have good credit, you can probably get a vehicle loan for very cheap, but you are still paying above and beyond the cost of the car for somebody's money to buy this vehicle.
  3. You don't have to worry about depreciation. It is still a factor, and you should be smart about the type of vehicle and the year vehicle you buy so that you don't lose a ton of money upfront. But depreciation is not a cash cost when you own the car outright. If you don't have the cost of depreciation, interest, or principal payments on the vehicle, you can see why owning a car outright is so cheap relative to the other two ways.

When you're going to buy a car outright and have cash in your hands, you make decisions differently. You're more critical and detail-oriented when it comes to purchasing the vehicle. You will buy a car that you can afford. You're overall going to end up making a better purchase.

Closing thoughts

After outright ownership, the car is now your asset so that you can walk into any dealership at any time with your car and cash, and you can buy your next vehicle without having to deal with paying off a loan. Every single month, the average American is paying $584 for a car payment. If you multiply that by two (the average American household has two vehicles), we have the average American paying over a thousand dollars a month to own their cars. Imagine the power of that money invested in a long-term investment. Think of the power that the freedom of debt brings to somebody's life and not being burdened by payments or by an obligation to pay if you lose your job, your salary fluctuates, or your business income is irregular.

Leo Marte is a Christian financial advisor and CERTIFIED FINANCIAL PLANNER™. Abundant Advisors provides financial advice for Christians with convenient virtual meetings. Let’s talk if you are ready to make the next move.