Unless you live in the heart of a large city with accessible mass-transit, you probably need a vehicle. Unfortunately, vehicles can be an expensive component of your finances. When it is time for a new vehicle, do you buy a new or used car? Or, do you skip buying altogether and lease?
Buying a New Car
Unlike buying a house, when you buy a vehicle, it has no chance to increase in value. Vehicles are depreciating assets, which mean they are not investments, but an expense. Buying a car can still be a good decision, but the type of vehicle, along with whether you buy new or used will have a significant impact on the financial outcome.
If you choose to buy a new car, keep in mind that the average car loses around 50% of its value over the first three years you own it. This is extremely important if you are someone who likes to buy a brand new car every few years. You will be wasting a lot of money to depreciation just to have the latest model.
Buying a Used Car
This is where buying used can create more value. If you buy a car that is already two or three years old, you’re letting someone else lose money on the initial depreciation. This also means that by buying a vehicle that is a couple years old, you’re getting a relatively new vehicle at 25-50% off what you would have paid just a few years ago.
Buying used is becoming even more attractive in recent years due to warranties. In the past, buying a used car usually meant giving up the manufacturer’s warranty. Now, as automotive companies fiercely compete for business, you can often obtain a used car while still retaining the warranty, or even have the ability to purchase an extended warranty.
Finally, if you choose to lease instead of buy, there are a few important considerations. On the surface, a lease always sounds like an affordable way to get into a brand new car. While it’s true that you may be able to keep monthly payments down with a lease, it does have drawbacks.
First you have the down payment. When you put money down on a new car purchase, that money will go right into the value of the car and reduce the amount of money you have to borrow. With a lease, there is almost always some sort of money due up front, which can be $2,000 or more. This is lost money, and you will still need to make the same required monthly payments.
Jeremy is the author of the personal finance blog Generation X Finance, which aims to help a unique generation achieve financial independence. Jeremy also writes for the Financial Planning topic over at About.com. He currently works as a retirement plan specialist with a focus on employer-sponsored plans.