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Buying versus leasing

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One of the advantages of working on a yacht is that you don’t have some of the major expenses that most people have in life such as utilities and food. But many yachties do still have a car.



Several of my clients have asked me recently which is the better option, financially: buying or leasing. As with most financial decision, what’s best for you depends on your circumstances. Let’s look at both



The average new car loan at the end of 2012 was $26,691. And in the fourth quarter of 2012, the average length of a new car loan increased to 65 months, a new record. A larger percentage of car buyers are taking out loans with repayment periods that last for six to seven years, which might help them qualify to buy a pricier car but also increases the effective cost over time.



For example, a borrower with a five-year, $25,000 car loan with a 4.5 percent annual percentage rate would have monthly payments of $466 and pay $2,960 in total interest. A seven-year loan at the same rate would have lower monthly payments of $348, but the borrower would pay $1,272 more interest over the life of the loan.



About 20 percent of all car transactions are leases, which means the consumer pays to use the car for a set number of months before returning it to the dealer.



Car manufacturers sometimes offer “subsidized” leases that can make them a better deal than a purchase. As with a sale, a buyer can haggle with the dealer over the capitalized cost (vehicle price). The money factor (which represents the interest rate) and the residual value (what the car or truck is worth at the end of the lease) may also be negotiated.



Leases have several aspects that make them good choices over buying a new car. For example, the down payment is usually low, and sometimes nonexistent. Monthly payments, too, are lower than loan payments, and leases are often easier to obtain than a loan.



What’s more, maintenance costs are next to nothing, since most warranties for new cars last three years, about the same amount of time as the average lease.



But there are extra expenses with a lease. Insurance rates are usually higher for leased vehicles since lease coverage may include gap insurance, which pays off what is still owed on the lease in the event the car is totaled.

And, since you turn in your car every three years, if you lease a car that requires a down payment, that expense will come out of your pocket each time you get a new lease. Each time you turn in your old car for a new one, there are added fees. If the dealer determines that your car has more than normal wear and tear on it, you’ll be charged for repairs.



Mileage, too, adds to the cost of a lease when you turn in the car. Most three-year leases allow for 36,000 to 45,000 miles. Extra fees of anywhere from 5 to 20 cents per mile can really add up.



To examine the real costs of buying versus leasing a car, you have to take into account the life of the car. Up to five years, they are pretty even, but once past that five-year point, payments and insurance start to drop off and you start building equity in an owned vehicle. Even though maintenance may be higher, in most cases you come out ahead.



If you can live with a car for 10 years, buying makes better financial sense.



After adjusting for maintenance and other operational costs, you would have spent around $43,000 for that new $20,000 car you purchased 10 years ago. It’s a staggering amount, but on the other hand, consider how much you would have spent leasing cars for the same 10-year period: more than $64,000, plus you would have no equity.



And even after 10 years, an owned car should still be worth a portion of its original value. For example, in 1998, a Toyota Camry LE went for about $21,000. In 2007, that same car in excellent condition was worth $4,075 as a trade-in. So, after 10 years, the trade-in value of the car subtracted from the cost of owning the car for the past 10 years could bring the car’s total cost down to less than $40,000.



Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial goals.


 

Capt. Mark A. Cline is a chartered senior financial planner. Contact him at +1 954-764-2929 or through www.clinefinancial.net. Comments on this column are welcome at editorial@the-triton.com.

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