Getting a new car is a major milestone, but it often comes with a side of stress regarding the financial commitment. Whether your old vehicle was totaled or you're simply ready to treat yourself to a safer or more reliable ride, it's normal to worry about making the "wrong" choice. We're here to walk you through the numbers so you can feel good about what you park in your driveway.
3 myths to ignore at the dealership
There is a lot of outdated advice floating around the car lot. Let's bust three common myths so you can walk in with confidence.
Myth No. 1: Cash is king
You might think walking in with enough cash to buy a vehicle outright puts you in the driver's seat during negotiations. Interestingly, the opposite is true. Dealers actually make a better profit when a buyer finances a new vehicle through them rather than buying it outright.
Here's what you should do: avoid discussing how you intend to pay for the vehicle until you finalize the deal. Under no circumstances should you tell a salesperson your desired monthly payment. If you do, you're likely to receive a quote that is suspiciously similar to your stated allowance but might hide extra costs.
Myth No. 2: Timing is everything
It used to be true that the best deals happened at the end of a month, quarter, or model year because dealers were working to meet quotas. However, supply chain issues and computer chip shortages have constrained supply significantly. Today, the few deals available generally aren't linked to mining specific calendar dates.
Don't rush or feel pressured to make a decision based on the calendar. Take your time to find the right car for your needs.
Myth No. 3: You can change your mind
Too many buyers believe they have three days to cancel their purchase. This is a big myth and often just a sales tactic designed to rush buyers into snap decisions. A signed sales contract is legally binding as long as the dealership fulfills its obligations.
The "three-day myth" stems from a Federal Trade Commission rule that provides a "cooling off period" for purchases made at home from someone selling door-to-door. It doesn't apply here. Make sure you are 100% comfortable before signing on the dotted line because there are no "backsies" after you've committed.
The real difference between buying and leasing
While the myths are tricky, the math is usually straightforward. First, it helps to understand that leasing is really another word for renting. Just as you might rent a vehicle for a week on vacation, a lease lets you rent a car for one-to-several years.
When the lease period ends, you turn in the vehicle and walk away. At that time, you may have to pay a fee, or you may have the option to purchase the vehicle at a price determined when the lease began. You can then buy the car, lease a different one, or live without one.
When you buy a vehicle, it's yours once you've finished paying for it. You can continue driving it, sell it, or trade it in to help purchase another one.
The pros and cons of leasing a car
Leasing can be a great option if you love driving new cars, but it comes with restrictions.
Advantages of leasing:
- You drive a new or newer vehicle during its most trouble-free years while it's under warranty.
- The contract may cover oil changes or other basic maintenance issues.
- You might be able to drive a nicer vehicle than if you bought one.
- You may need less cash upfront for a lease than you would if you were buying.
- You don't have to worry about what the vehicle is worth down the road.
- If you lease a car for business, there may be significant tax advantages.
- You can walk away when the lease is over without the hassle of selling or trading it in.
Disadvantages of leasing:
- The monthly payments will never end if you lease one vehicle after another.
- There will probably be a limit on how many miles you can drive and charges if you exceed that limit (and no credit for unused miles).
- You must maintain the vehicle and are responsible for damages and excessive wear and tear.
- If you don't like the vehicle or can't afford the payments, you may be stuck or have to pay significant early termination fees.
- You must return the vehicle in the same condition it was in when it left the showroom, meaning no modifications.
The pros and cons of buying a car
Buying offers more freedom and the potential for equity, but it also brings more long-term responsibility.
Advantages of buying:
- You own a vehicle that will still be worth something after you've finished paying for it.
- You can do anything you want to the vehicle.
- You can drive as many miles as you wish without penalty.
- You can give it to someone else, such as a child, temporarily or permanently.
- The cost of insurance may decline as the car loses value.
- You can sell or otherwise dispose of the vehicle whenever you wish.
Disadvantages of buying:
- Once the manufacturer's warranty ends, you're liable for all repairs.
- As your vehicle ages, it will no longer have the latest safety and convenience features.
- Buying a vehicle may require more money for a down payment.
- Loan payments may last years longer than lease payments.
- The value of your vehicle will fluctuate over time, affecting its resale or trade-in value.
It's also worth noting that both auto loans and lease payments will have the same effect on your credit score. On-time payments will boost your score in both cases, and both types of payments affect how much credit you're using.
How to calculate the Total Cost of Ownership (TCO)
To find the true value of your car, you need to look beyond the monthly payment and find the Total Cost of Ownership or TCO. Edmunds.com has a handy calculator you can use to find this number.
Match the terms
Make sure it's an apples-to-apples comparison. If your vehicle loan is six years, you might want to calculate the cost of two three-year leases to match the timeframes. While longer leases exist, three years is the most common.
Factor in the extras
If the lease or purchase includes free maintenance, include that value in your calculations. If you're considering different vehicles (like leasing Vehicle A vs. buying Vehicle B), research whether insurance, maintenance, or driving costs will differ significantly.
Don't forget opportunity cost
Finally, do one more calculation. If the down payment or monthly payments between the two options differ significantly, think about what you'd do with the "extra" money if you chose the cheaper alternative. For example, putting an extra $200/month in your retirement account could make a big difference down the road.
Remember that both purchases and leases may be negotiable. Lease payments are often based on the vehicle's manufacturer's suggested retail price (MSRP). If the dealer is willing to negotiate the price of the vehicle for a buyer, the starting price for lease calculations may also be negotiable.
The Facet difference
At Facet, we don't sell cars, and we don't make commissions on auto loans. The Facet difference is built on a simple premise: a member-first approach that aligns your money with the life you want to live. Because we operate on a flat-fee structure, our advice remains objective and tailored exactly to your well-being. We provide a simplified experience where a CFP® professional helps you navigate complex choices without the stress.
Whether you're deciding between a lease and a loan or figuring out how a new car payment fits into your retirement goals, we're here to help you weigh the tradeoffs. We can help you crunch the numbers on the Total Cost of Ownership so you can make a decision that feels right for your wallet and your values.
