From time to time, most of us who need a car also need to consider when to change it. There are some folk who are wedded to their vehicle, come what may, and will happily spend all their waking hours under the bonnet fixing a hole because they are enthusiasts. Been there, done that. There’s not much that I don’t know about 1956 Land Rover engines or Morris Minor gearboxes. But that was years ago and cars today are all computerised requiring complex equipment to maintain. Then there are some folk who follow the creed of keeping their anonymous and boring set of wheels almost until the eponymous objects fall off – they don’t care what they drive as long as it is cheap.
We are neither of such families. True, given the money, I have my favourite dream car but for the moment we have accepted the inevitable and drive a nice, economical but fairly small car, mainly because we do very few miles almost entirely in the city.
The first thing to consider is whether to buy – possibly with part exchange – or to lease, by which I include all similar approaches where you pay monthly, possibly with an upfront cost of a few month’s lease, then hand the car back after (up to) three years. Some plans include the facility to buy while others specifically exclude this.
If cost is a concern, we need to look no further than most businesses – better ones run a fleet of fairly new vehicles. These are nearly always leased. What is it that applies to business but doesn’t apply to individuals? A major reason of course is accounting – a vehicle that is owned will appear as an asset on the business while one that is rented will not. A business can also reclaim the VAT (sales tax) on the rental for a vehicle that is used 100% for business but not on one that is purchased.
Otherwise, money is a common issue for business and private individuals and here leasing has an important advantage – you don’t have to lay out all the money upfront (or borrow it) as monthly leasing charges are a lot lower than servicing a loan.
Assuming you don’t have the money in your back pocket, how do you finance a new car?
In the first instance you need to have available flexible car finance options.
But which option to choose?
We believe that you should lease, if you want:
- the latest new vehicle
- lower monthly payments (or the opportunity to drive a more prestigious car)
- lower running cost (better fuel consumption, lower maintenance)
- the latest safety features
- a vehicle always under warranty
- to forget about MOTs and stuff
- to free up cash flow
- to avoid trading and selling used vehicles
and for businesses, you want:
- the vehicle off the balance sheet, particularly to keep lines of credit free
- to be able to reclaim some or all of the VAT (sales tax)
But you should buy if you:
- either can part-exchange a recent car, have the whole purchase price or don’t mind borrowing
- prefer to build up trade-in or resale value
- like the idea of ownership
- don’t mind the cost of repairs/MOT after the warranty has expired
- prefer to drive the same vehicle for many years spread out the cost
The decision is yours really. The only thing to realise about leasing is that as you don’t actually own the vehicle and are committed to returning it, the leasing company has to make an estimate of the future value when the lease terminates so estimates of mileage are important. If you go over the estimate, there are always penalties, as well of course if you scratch or otherwise damage the car. You may also have to get a document should you want to take the vehicle overseas to show that you are entitled to use it.
As Tim Ferriss says, don’t own anything – rent it if you need it! Of course renting a car every day you need it may be a bit far – can you always tell when you need to get a new appliance because the old one has failed? To many of us, a car is fairly useful or essential.
We looked at the cost of motoring last year and then made a silly error – we bought the car after the expiry of the lease. We then tried to sell to no avail and eventually ended up going to a car sale website which promised rather more than it delivered. We have included further tips on buying cars here.
Do you buy or do you lease your cars?
photo credit: pedrosimoes7 via photopin cc
We have always bought, but sometimes leasing can be good also. W works at a new car dealership and he says there are plenty of times when leasing saves you more money.
We tend to think so but it’s probably different for everyone! If you want a new car then leasing is generally the cheapest option. If you want to run an old car then the logic is to run it into the ground. It’s your choice really.
Buy used…very used. Honda or Toyota…and drive the wheels off of it!
This is one of the options of course – and you have to select fundamentally sound makes as you do.
Two of the worst cars I’ve ever had were a Saab 9000 Turbo where the auto box failed twice and despite a full manufacturer’s service history they didn’t offer any discount (it later transpired that there was a generic fault on the Borg Warner box). Being stuck 200 miles from home with two small children and a not-yet-wife is no fun, believe me! And a Mercedes C180 again with a full service history and when I took it in for servicing, I was told of 3 or 4 faults including a differential oil leak which would cost about £2000 to fix. That car went pretty quickly! Prestigious cars both, well appointed lounges on wheels – particularly the Saab which when it went was very fast.
So I gave up on buying older cars! I have had some good older vehicles as well, including a Saab 96 which I ran into the ground and a Fiat Multiple which was a great vehicle – until I heard CV joint noise on a windy road. The only Japanese car I’ve had was a Lexus is220d which was lovely to drive except it had very poor visibility and the diesel or something about it made both Maria our son feel sick.
Truth be told, I’m with Tony! Cars lose value every day. If you lease, you don’t get any return on your investment other than some mileage or, if you buy, you get very little return in most cases. So, I got with buy used and drive it till the wheels fall off! Thanks for the great post, I’d love to see you around CNA some time!
I think in the ‘old days’ when you could repair cars yourself, that was an option. Nowadays even older cars can be quite difficult to fix as they are beginning to be of a generation where customised electronics and computers took over.
You don’t actually notice the drip-drip out of the pocket. Insurance premiums are good guide to this as most insurance payouts are for fixing the car when you bend it.
Even a set of tyres can set you back quite a bit and that is necessary – unlike the rest of cars, tyre life hasn’t improved by that much over the last 20 years or so. Then you have to consider fuel economy. Today’s cars can be very economical – and are getting better. We already see cars offering in excess of 80 miles per (Imperial) gallon (64mpg US). OK in Europe we tend to have much higher tax on fuel than in the US but you drive so many more miles. This of course is why the US auto industry has had massive shocks – big Chevvy gas guzzlers may look good in movies but not when they hit your pocket!
I am a bit of a petrol head, watch Top Gear and used to rally Land Rovers off road, which is why I know so much about them. But these days for me a car is just another tool. I just want it to be well made, reliable and fun to drive.
But if you really don’t mind having to spend the weekend taking the car to pieces, hoping you can get it done before Monday and that you have all the bits when the stores are closed, OK. Enjoy! Wait till you are married!
Lease or buy – This is one of the biggest questions in personal finance.
And without wanting to sit on the fence, it depends upon your circumstances.
If you drive a fair number of miles on a regular basis and need a reliable car, leasing could work out well for you. Provided you don’t fall into the trap of buying more car than you need.
However, if you drive fewer miles and your aim is to spend as little as possible, buying a two year old Honda or Toyota and running it till the bottom falls out can be a viable option.
Thanks for stopping by, @Stuart.
From this analysis we are in the wrong camp – low mileage and leasing! But I still think that the zero maintenance cost, no MOT (annual test) and much better fuel economy is worth while! In the end it’s a decision for everyone from their personal situation.
We’ve always bought our cars as don’t see any real value in leasing. We’ll finance if we can get a good deal on the rates, which has not been a big issue the last few years as we have really good credit.
It depends on the car source, @JohnS. The advantage of leasing is not so much the finance rates but the price at which the leasing company can buy the cars. Go to the car showroom and you may be able to get something off the cost and then get a good finance deal. But a really big purchaser deals directly with the manufacturer – or is the manufacturer – and they may be very anxious these days to keep their factories running.
Sometimes you also get offers of cars that have been bulk purchased for the same reason but are not taken up. This is a type of inertial selling – select a popular brand and configuration of vehicle, make lots and lots of them then move them rapidly into the market by heavy discounting. Since a substantial part of the cost is the showroom storage waiting for a customer, this makes a lot of sense from a manufacturers point of view even though there is then a glut of the same model around. This is how we ended up with a Lexus is220d for three years at a ridiculously cheap price.
It is even better for fleet purchases by businesses for tax reasons (at least in the UK but I guess similar ideas apply everywhere) but individual purchasers still get the bulk purchase advantage.