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Need a Car? Should You Lease or Buy?


 

"When money talks, nobody notices what grammar it uses."


-Unknown

 

If you live in the United States there's a really good chance that you need a car. Obviously, there are some people who are able to get by strictly on public transportation, walking, biking, and taxis, but for most of us we have to have a vehicle. The decision to how best to secure your vehicle is often under-examined. 


Should you buy or should you lease?


lease versus buy decision

3 Ways to Get a Car


There are basically three ways you can get your hands on a car, and two involve buying it. The first is to buy it with cash. The second is to buy it with a loan. Lastly, you can lease it. I'll talk about each of those below.


Buying with Cash


The first option is the most straightforward. You buy the car for cash. You can do this at a dealer or privately. You quite literally pay cash to the previous owner and they give you the car. 

Sometimes we have enough cash in savings because we were saving for a car and sometimes we withdraw money from an investment account, but hopefully in either case you were planning for your car purchase. 


Easy. It's a simple transaction that looks like this...


buying a car with cash

Buying with a Loan


Many times it's not possible or advisable to withdraw money and pay cash for a car. For many, we don't have that kind of money saved up. Or, we may have the money but the rates on car loans are less than our perceived future returns on our investments. 


Since we don't have the money available, we take out a loan from a bank. This bank could be the financing department of a car dealer, it could be the bank a car dealer puts us in touch with, or it could be our own bank. 


We can get the car from either a dealer or a private party. It looks like this...


buying a car with a loan

The two circle diagram is what it looks like technically, and especially if we get a loan from our bank to pay a third party. If you use financing from a dealer, the money usually flows right from the bank to the dealer, so that feels like a pyramid and looks like this...


buying a car with a loan

Leasing


A lease is not the purchase of a car. You are effectively renting the car for a few years. Because you don't ever own the car the payments are usually a lot more affordable than a loan payment on a similar car would be. This is why many people consider leasing. Unfortunately, this is the only reason people consider leasing and often times it's not quite understood that leasing comes with strict mileage caps, maintenance schedules, insurance requirements, and lack of flexibility (for example, you can't sell the car if you lose your job or don't need it anymore). 


Leasing kind of looks like this...


leasing a vehicle is not buying it