Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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Leasing or Purchasing a Car: 6 Financial Tips You Should Follow
Nov 8, 2023
Image: Unsplash/Valerie Kaarna
Whether you're in the market for a new vehicle or considering an upgrade, the decision to lease or purchase a car can significantly impact your finances. It's a choice that goes beyond personal preferences and extends to long-term financial stability. To help you make an informed decision, we've compiled six financial tips that can guide you in the right direction, ensuring you choose the option that aligns with your budget, lifestyle, and future financial goals.
1. Evaluate Your Budget Thoroughly
Before you start shopping for a new car, it's essential to assess your budget comprehensively. Determine how much you can comfortably allocate to a vehicle each month without straining your finances. Take into account your monthly income, existing expenses, and potential changes in your financial situation. While leasing often comes with lower monthly payments compared to financing a purchase, it's crucial to consider the total cost over the lease term or loan period. Understanding your budget constraints will help you avoid overextending yourself and make a choice that's financially sustainable.
2. Consider Your Mileage Habits
One significant factor that distinguishes leasing from purchasing is the mileage limitation typically associated with leases. Leasing contracts often specify an annual mileage limit, and exceeding this limit can result in additional fees. It's essential to evaluate your driving habits and whether they align with the restrictions of a lease. If you have a long daily commute or frequently take road trips, purchasing might be a more suitable option, as it allows for higher mileage without penalties. However, if you primarily use your vehicle for local commuting and can stay within the lease's mileage limits, leasing could be a more cost-effective choice.
3. Factor in Depreciation
Vehicle depreciation is an important consideration when deciding between leasing and purchasing. New cars tend to depreciate rapidly, with the most significant drop in value occurring within the first few years. Leasing allows you to avoid the long-term effects of depreciation because you're essentially renting the car for a fixed period. On the other hand, when you purchase a vehicle, you take on the responsibility of its depreciation over time. While this means you build equity in the car, it can also result in a more substantial financial loss if you decide to sell the vehicle before it's fully paid off. To mitigate the impact of depreciation, consider the expected resale value of the car, especially if you plan to keep it for an extended period.
4. Examine Interest Rates and Financing Options
Financing a car purchase typically involves taking out an auto loan, and the interest rates on these loans can vary significantly. It's advisable to research and compare interest rates from various lenders, including banks, credit unions, and online financial institutions. Additionally, consider the duration of your loan; while longer loan terms result in lower monthly payments, they can also lead to higher overall interest costs. Choosing the right financing option, whether it's a traditional loan, a lease, or a 0% APR offer, depends on your financial circumstances and objectives.
Different types of leases offer varying degrees of flexibility and cost-effectiveness. While conducting your research, consider a novated lease, especially if your employer offers this as part of a salary packaging arrangement, as it can provide you with a cost-effective and tax-efficient way to lease a vehicle. Open-end leases, closed-end leases, and sub-leases each offer varying degrees of flexibility, cost-effectiveness, and risk, and should be carefully considered when deciding on the best car leasing option for you. Evaluate all available options to make an informed decision.
5. Review Insurance Costs
Insurance is a recurring expense associated with car ownership, and it's another aspect that can affect your overall budget. Before making a decision, it's essential to obtain insurance quotes for the specific make and model of the vehicle you're considering. Insurance rates can vary based on the type of car, its age, and its safety features. In general, new cars often come with higher insurance premiums due to their higher replacement costs. Leasing companies usually require a more comprehensive level of insurance coverage, which can result in increased insurance expenses compared to financing a purchase. Factor in these insurance costs when assessing the overall financial impact of leasing or purchasing.
6. Plan for Long-Term Goals
Consider your long-term financial goals and how they align with the decision to lease or purchase a car. Leasing typically provides the flexibility of driving a new vehicle every few years, which can be appealing if you enjoy having the latest features and technology. However, leasing may not be the most cost-effective option if you're planning to keep your car for an extended period or if you aim to build equity in an asset. If you prioritize long-term financial stability and the potential for car ownership without monthly payments in the future, purchasing may be the better choice.
Image: Pexels/Tobi
The choice between leasing and purchasing a car involves various financial factors that can significantly impact your budget and future financial goals. Evaluating your budget, considering your mileage habits, factoring in depreciation, examining interest rates and financing options, reviewing insurance costs, and planning for long-term objectives are essential steps in making an informed decision. By weighing these financial tips, you can select the option that best aligns with your unique financial circumstances, allowing you to enjoy your new car while maintaining financial stability.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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