By Lee Sherman
The decision to buy or lease your new car isn’t an easy one. If you buy, it’ll cost you more each month but, in the end, you’ll own the car and can resell it. But consider that a new car begins to lose value the minute you drive it off the lot. According to current depreciation rates the value of a new vehicle can drop by more than 20 percent after the first 12 months of ownership, and over the next four years, it will continue to lose roughly 10 percent of its value annually. Turns out that new car might not be the best investment after all.
This is one big reason why leasing can be appealing. Not only will your monthly payments be lower but the cost of ownership will be borne by the leasing company not you. Leasing is also more flexible, allowing you to switch to a new car at the end of the lease period. Just as with early adopters wanting the new iPhone, this appeals to car enthusiasts that always want to drive the most advanced vehicles.
Whether you buy or lease will affect your tax situation and ultimately how much the vehicle actually costs. When purchasing a car, you’re paying with post-tax dollars, adding to the cost of the vehicle. On the other hand, when leasing, you’re doing so with pre-tax dollars and those payments can be written off as a business expense, saving you a lot of money. Be aware though, that you will miss out on any depreciation deductions when you lease. You may still be able to take advantage of Section 179, however, which allows you to take a tax deduction of the value of that vehicle over its lifetime. Make sure to consult a tax attorney for the latest regulations.
Car ownership isn’t what it used to be. Leasing has long made sense when it comes to expensive luxury cars that you might never be able to afford. Increasingly, other kinds of cars such as compact cars, sedans and SUVs are being leased rather than purchased outright, again because of the cost savings, tax benefits, and flexibility that it provides.
In fact, owning a car outright has become prohibitively expensive for Millennial and younger generations. With the convenience of ride-sharing options (Uber & Lyft) and delivery services (Door Dash, Amazon, and Instacart), many have given up driving themselves.
COVID-19 has only accelerated this trend, as more people are working from home, ordering in, and limiting travel.
Less demand for new cars combined with the lower interest rates that naturally occur in a recession, means that this is probably the best time in recent years to lease your vehicle if you still need one.
Leasing, like subscription entertainment services, such as Spotify or Disney+, can seem like they are locking you into a never-ending payment cycle without any actual reward at the end. But, according to financial planners, it’s important to look at your overall financial picture. Older people may be emotionally attached to the concept of ownership. But renting, borrowing, subscribing or leasing, can make more financial sense.
For an individual, there’s no easy answer to whether buying or leasing is more economical. In the long run, it comes down to what kind of car you want, how much you plan to drive it, whether you hope to resell it, or need to buy or lease a new car at the end of the lease period.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.