"When money talks, nobody notices what grammar it uses."
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?
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 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...
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...
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 Might Be Right...But Probably Not
There are situations where leasing may be the right choice for you, but those situations are few and far between.
Some people who value driving brand new cars and have the income to support leasing, might be better off leasing. Others lease because the technology in cars in increasing so fast that they feel safer driving vehicles that it makes more sense for them to lease.
The reason to lease is not because you can't afford a car without leasing. If you have to lease in order to get a car, consider getting a less expensive car. People tend t think that leasing is cheaper because the monthly payment is cheaper, but the monthly payment is a distraction that doesn't tell the real story. In the long run you will be able to drive your car (that you eventually own) with out a payment. Further, since you are used to making a payment you can take that payment and put in into a savings account earmarked for your next car - that way to still make a "car payment" but you make interest instead of pay interest.
Understanding the difference and knowing your long term plans and reasons for your vehicles is good money health.
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