By: Jacqueline Leuby
It’s that time of year again, when vehicle manufacturers release the newest models. Every time you turn on the TV, there is an ad for the latest new car which you could drive today! And, who doesn’t love driving a new car? Before you give into the dealerships, you should consider several financial factors.
First, you need an accurate picture of what can you afford. A good method in assessing your financial picture is creating a budget. Here is a link to Charles Schwab’s Monthly Budget Planner guide for creating a budget: Click here
Review your budget and ask yourself these questions:
- How much are you willing to allocate in your budget towards a monthly car or lease payment?
- Do you have money in your savings to use for a down payment?
- Consider the cost of ongoing expenses:
- Car insurance premium
- Routine maintenance
Determine your price limits. Then, evaluate how long do you want to keep your car?
If you want a new car every three years, leasing may be the best option for you. If you plan to drive your car until the wheels fall off, buying may be the best option.
A lease is a contract in which you (the lessee) pay the lessor (owner) for use of the asset. When leasing a car, you are only paying a portion of the car’s value. You agree on the amount of miles (e.g. 36,000) and the period of length (e.g. 3 years). With this method, you could lease a more expensive car and pay less than buying the same car.
The most important item to know when considering a lease is having a good understanding of your average annual miles. If you lease a car and you use more miles than allowed in your contract, you will most likely be penalized with a fee. An example is for every mile you exceed, you will pay $0.20. This seems like a small amount, but if you go over by 5,000 miles, you will pay an extra $1,000.
Helpful tip: When negotiating a lease, always ask the dealership for the selling price of the car. The lease payment will always be based on the lease value, which is the difference between the sales price and the lease end value. If you can negotiate the sales price down, you can lower the amount you will pay for the lease.
Buying the car means you are the owner. You can purchase the car with financing or cash.
Helpful tip: Call your car insurance agent ahead of time and ask him or her to estimate your new car insurance premium. Your premium can be greatly affected by the year and model of your car.
Take your time selecting a car. Sometimes the car dealership will tell you the deal ends today and they are not willing to negotiate with you. If that’s the case, they might not be the dealership for you. Good car dealerships will work with you!
Whether you lease or buy a car, it is a big financial transaction which will impact your savings and monthly budget. Before deciding, review these tools to assist in your decision:
- Lease or Buy Bank Rate Calculator: http://www.bankrate.com/calculators/auto/lease-buy-car.aspx
- Kelly Blue Book: Assess the value of different cars: http://www.kbb.com/