What Type Of Purchase Agreement (And Type Of Vehicle) Is Right For You?
Posted on: 20 April 2015
If your current vehicle is nearing the end of its life, you may be evaluating the options for its replacement. In today's market, there are more types of vehicles available at a wider price range than ever before -- how can you make the right selection? What type of vehicle transaction makes sense for your income and lifestyle? Read on to learn more about the factors that can influence your decision to purchase or lease, as well as whether a new or used vehicle is the best choice for you.
Should you purchase or lease?
With low monthly payments and the option to keep or trade your vehicle after just a few years, leases can be tempting. How can you determine whether you should lease or purchase a vehicle?
- Interest rate
Interest rates on loans for the purchase of cars and trucks are rebounding from an all-time low in late 2013. However, even though rates have risen a bit since 2013, if you have good credit you can still obtain a very competitive interest rate on a new vehicle. Because interest rates on new vehicles are generally a little lower than interest rates on used vehicles, in markets where interest rates on new vehicles are low, the purchase of a new vehicle often wins out over a lease.
In markets where interest rates on new vehicles are high, a lease may be a more cost-effective option -- particularly if you'd like a lower monthly payment. When a new car is purchased at a high interest rate, because these loans are for a fairly short term, a significant portion of each monthly payment will go straight to interest.
- Lifestyle
Although you're able to purchase "high mileage" leases, one of the most restrictive parts of leasing a vehicle is being limited in the number of miles you can drive. Most leases will limit you to 10,000 to 15,000 miles per year of the lease -- and you could be charged as much as 25 cents per mile for each mile that exceeds this limit.
If your lifestyle doesn't involve lengthy trips or a substantial commute, you may be able to save money by leasing your car. However, if you regularly drive more than 12,000 miles per year, you'll want to factor in the "over mileage" costs you may incur before your lease is through.
- Down payment
Often, the decision whether to lease or buy comes down to the cash required up front. Many leases offer a surprisingly low monthly payment -- this is possible in part because a large down payment is required before the lease is signed. If you have the cash on hand, this can be a great option; but if coming up with several thousand in cash will be a hardship, you may want to instead purchase a vehicle with no or low down payment.
If you purchase, should you select a new or used vehicle?
If you've determined that purchasing is a better fit for your lifestyle and wallet, you may now be wondering whether you should be browsing new or used vehicles. This decision largely depends on how long you expect to keep your new (or new to you) vehicle.
If you're the type who likes to drive cars until they're no longer operable, you may be better off purchasing a new vehicle. This can allow you to absorb the depreciation over a longer period of time, as well as provide you with the peace of mind of knowing your vehicle has been well cared for during its entire life.
If you'd rather trade in your vehicle every few years (but drive too many miles for a lease to be a viable option), purchasing a used vehicle can be a better choice. Because new vehicles often depreciate rapidly, you'll be able to take advantage of someone else's depreciation by purchasing a vehicle after it's been in use for a few years -- and when you sell this vehicle yourself, you'll be able to regain much of your purchase price. Once a vehicle is 3 years old, it can often be picked up for 50 percent or less of its original purchase price.
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