Many millennials today are torn between buying vs. leasing a car. It’s one of the biggest debates among millennials today and provides a great deal of explanation as to why car sales in U.S. are down. This subject, however, has been long debated far before these millennials became a hot topic. Neither one has a true clear advantage over the other. The decision to buy vs. lease ultimately depends on your personal preferences and needs. You should always conduct your own research when making any financial decision and this article will provide you some guidance to get you a head start.
Advantages of Buying
There’s truly nothing like the peace of mind you receive when you own something. This will hold true no matter which topic/asset class we’re discussing. When you buy a car, you own it and can either continue to drive it, rent it out to someone else, sell it, or trade it in for a new car. There are millennial-built sites out there now such as Turo, GetAround, and HyreCar that allow you to rent out your car to other people for money (just like Airbnb for your home). Instead of your car being the liability that it initially is, it can now be an asset that generates income each and every month. One of the keys to building wealth is to acquire assets that generate income. I personally own a car rental company that consistently generates positive cash flow each and every month and I haven’t had a penny of my own money tied into it yet. And of course, my target market is millennials.
Buying a car is also good for people looking to drive the same car over the long run (unlike your average millennial). You’re free to drive the car for as many miles as you want and you can keep the car in any condition you desire. You can sell your car at any time as well as modify it as much as possible. Lastly, you only have to carry minimum insurance coverage amounts required by state law. Overall, buying a car (just like any other asset class) is good for people who are in it for the long run.
Disadvantages of Buying
The two main disadvantages of buying include the fact that you typically must make a down payment, which is an up-front cost (unless you’re a savvy negotiator) and you typically must settle for a low trade-in value. One potential way around this is to sell your car to a third-party (i.e. not a greedy dealer that will give you chump change for your precious car then turn around and sell to someone else the next day for a much higher price).
Advantages of Leasing
Although buying has a significant amount of advantages, leasing has its fair share as well. You can trade in the car very frequently (good for people who like to switch cars often like millennials). Your monthly lease payments are typically lower than monthly loan payments on a car. This allows you to capitalize on the time value of money/opportunity cost, but if and only if you invest the difference, which most people don’t do. There’s typically no down payment required, which further boosts the time value of money concept (invest the difference and gain a greater return over time). Lastly, a car does not appreciate in value like a home does so there is no equity build up in a car. Overall, leasing is good for people in it for the short-term.
Disadvantages of Leasing
Since you don’t own the car, you must return it at some point. Your annual mileage will be limited (typically 12,000 to 15,000 miles per year) and penalties may apply if there are damages to the car when you turn it in. You can be stuck with your car for the term of the lease (generally steep penalties for early termination) and you’re typically required to carry more insurance than state minimums. Lastly, you have no say in the customization of the car.
Conclusion
As previously stated, there is no clear-cut advantage to buying vs. leasing a car. The decision depends on your specific needs. If you travel a lot, then leasing may make the most sense. If you don’t travel at all, then you may want to consider buying, especially knowing that you can rent it out to someone else during the days you don’t need it. What’s my take? I’m an owner and will always prefer owning something vs. renting it. Always. I have a long-term perspective on life. I don’t travel very often and I plan to be in Chicago for a very long time. So for me, it makes sense to own. As a matter of fact, I don’t rent anything. I have no active lease agreements where I’m the lessee. Rather, I’m the lessor (owner). In conclusion, you must know yourself and your desires. There’s no one size fits all when it comes to life.
If you have any questions or comments, please don’t hesitate to reach out.