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Investment Insights | Finance or Lease Your Next Car?

James E. Brennan, CFP®, 1 North Wealth Services

Considerations for Your Next Car

There are two things in life that I strongly urge all clients not to go cheap on: 1) Health insurance; and 2) Auto safety. For the second item, particularly for those of you in retirement, that means looking at new cars rather than used cars. Since the total cost of buying a new car can take a serious bite out of your taxable savings, I will very often recommend financing or leasing your new car, particularly when interest rates are low. Should You Finance or Lease Your Next Car?
If you are a two-car family and/or heading into retirement, the first question I will ask is, “Do you (or will you) drive less than 15,000 miles per year with at least one of your cars?” If the answer is yes, then I want you to consider leasing at least one of your two cars. The top reason? Safety!

If you look at the safety features on a 2016 model car vs. what you can get now on a 2019 model car, the advances are astounding. My current 2019 RAV4 hybrid can literally drive itself while getting 35+ MPH. Imagine what advances these cars will have in just 3 more years. With a newly-leased car every 3 years, you can guarantee that you will get the latest safety features on your most used (and certainly riskiest daily activity) investment every 3 years.

Apart from these important safety upgrades, as long as you drive less than 45,000 miles over the 3-year lease, the monthly cost for a leased car compared to the same car financed for that same period is considerably less. It is, of course, true that you would own that same vehicle outright if you financed it, but it is also true that you own the safety features of a much older vehicle. As you enter retirement, that is the consideration I want us to focus on for at least one of your vehicles.

What is the Optimal Way to Purchase/Lease/Finance Your Next Car?

The optimal time to purchase/lease/finance a new car is after Labor Day. As next year’s models come in, dealers will be eager to move out the current year’s models. That being said, they will be just as eager to move out the next year’s models they have in stock before the new year. In my example, I bought my last two cars in late December and each were the next year’s models already in stock. The reason is the dealer will pay a hefty inventory tax for any unsold cars on January 1st; therefore, the closer you get to the end of the year, the better deals you will get on current or next year models already on the lot.

Research & Test Drive
The best place to start in researching the top-rated cars available with Edmunds and Kelly Blue Book. For hybrids, check out Green Car Reports. Once you have an idea of the type of car and the best rated for that type, you can go out and test drive a few. 

Once you find your perfect car, let the sales rep know that you could be interested (but you will walk away without buying today!). The key here is to get an offer sheet on the exact model car that you would like to buy. In fact, it is best if you can have the rep email you the offer sheet—the reason is very important for your next step!

True Car
I love! Once you have the exact details of your favorite car and an offer sheet for that exact car, your next step is to check for all of the exact model cars in the region. True Car will show you all of the dealers that have the same make, model, color, and details of your favorite car. You should contact the other dealers and forward the offer sheet you received from your first dealer. You will then ask them if they can beat this offer. Beware to make sure the VIN matches the details for the car you want. Sometimes, dealers will beat the price but show you a lesser priced car. Welcome to the art of online negotiation! You will have each dealer battling the other to get you the best deal and the best part? You never stepped foot in the showroom!

Last Step
All along, if the dealer has been asking if you will buy/lease/finance, you should state that you will buy the car outright. You will do the same when you get to the dealer and even bring a check to show them if you wish. This is part of the deal process. When you finally have your best offer from the dealer, you will then ask how much lower the price would go if you finance/lease your vehicle. Dealers do make money off of a finance or lease, so you should be able to get an even lower price (sometimes as much as $1,000) if you finance or lease the car. It is important to note that you do not have to take the dealer’s finance offer. Before going to the dealer, you can check with your bank (Pentagon Federal, Tower Fed, and SECU have some of the best auto loan deals) to see what they would offer you on a 5-year finance. Whether you finance or lease, I do not recommend putting money down. There should be no penalty on the offer if you do not put money down on your finance or lease.

One final note: do not mention a trade in, if you have one, until after you get your best deal and finance/lease offer. Dealers attempt to make that part of the deal negotiation. Always check Kelly Blue Book for your estimated trade-in value before going to the dealer. Personally, I am a fan of skipping the dealer if your trade-in is more than 5 years old. Consider gifting the car to a family member of using Auto Trader to sell your car. You will get much greater value than what the dealer is likely to offer you. I hope this helps. Car buying is right up there with dental visits or proctology exams, so if this can help relieve some pain from the process, as well as save you money (and most importantly, have you drive the safest car to protect your family and you!), then I am happy to help and here to guide you. Please feel free to share this article with your family and friends and have them call me if they have questions. Enjoy your new wheels!

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