Ok, so I’m kind of a car guy. I’m constantly boring my wife with ideas about what our next car should be. Drives her nuts. But… I’m also a finance guy. So while I’m boring her with details about our ideal next ride, I’m also boring her about how we should should paying for it.
So let’s talk cars. I’m often asked whether it’s better to lease or buy a car. The short answer? It depends.
In today’s “Do It Together” segment: I’ll explain the difference between leasing and buying, and walk you through some things to keep in mind when choosing your next ride.
We all know that cars are not an investment, no matter how much horsepower they have or how slick they look.
Carfax reports that cars lose 10 per cent of their value the moment you drive it off the lot, and on average, will lose another 10 per cent by the end of the first year. Not a great deal.
So how do you get the best deal on a car? Well, one of the cheapest ways to get a car is to buy a 1 or 2 year old car with low mileage, for cash, and drive it until you reach 100,000 km, then resell it. This way, you avoid that initial depreciation hit in the first year. If you don’t drive much, you might sell it after 3 or 4 years. If you keep the car in good condition and maybe throw in the winter tires, you’ll find a buyer at the other end at a decent price.
But what if you just can’t resist that new car? If you’re the type to change cars every 3 to 4 years and that’s just the way it’s going to be, then leasing is potentially the cheaper option compared to buying.
Beware: There is a ton of noise out there when it comes to getting a new car. There are dealer and manufacturer incentives, leasing and financing rates, down payments, trade-in values and residual values. There is a lot to consider. I’ll quickly explain what these are and what you need to focus on.
Now, it’s important to understand the push and pull between manufacturers and dealerships. The manufacturers will often run incentives (like lower lease rates, cash incentives, free upgrades…) in order to gain market share for the brand and/or a particular model. The dealer, on the other hand, is heavily incented based on sales targets set by the manufacturer. In other words, if a dealer makes its monthly quota, the manufacturer will often reimburse an amount per car sold that month to the dealer. This makes it really important for the dealer to hit their numbers every month. In fact, it can be the difference between a successful dealership and one that doesn’t make it.
What does this mean for you? Shopping at the end of the month is always better.
If the dealer is short on its quota, they’ll let cars go for much less just to get their numbers up.
Now back to leasing. When you’re leasing, there are three primary factors to negotiate: the price of the car, the lease rate and the residual value at the end of the lease. These three factors determine how much of the capital value of the car you’re going to shoulder for the term of the lease, and the interest you’ll pay to carry it.
Obviously, the lower the initial price of the car, the lower your lease payments will be. To keep the price as low as possible, remember what I said about shopping at the end of the month. A lower lease rate means lower payments too. If you’re sticking with the same car company, ask for a loyalty rebate on the lease rate. If you’re changing companies, ask for what’s called a conquest rebate for changing. Either way, the dealership should be able to knock something off the lease rate.
Now, what about residual values? They’re a little trickier. If you don’t plan on keeping the car, which is why you’re leasing in the first place, you want the highest residual value possible. That way, you’re paying down the least amount of capital on the car for the period that you have it.
I’ll end it here because we’ve covered a lot and getting a new car can be as complicated as the engine under a hood. In my next video, I’ll talk about what to look for if you decide to buy a car and a few tips on how to score the best deal.