The cheapest way to acquire a car is to pay cash for it up front. Unfortunately, paying for a car in its entirety is not an option for most young families. The choice then comes down to financing or leasing a car.
Let me start off by saying that young families shouldn’t be fooled by lower lease payments. There are, however, some advantages to leasing a car.
Leasing a Car: Advantages
- the monthly payments are considerably less than what you would pay if you financed the same car. The difference between leasing and financing a new Honda Accord is $125 per month
- taxes are only applied to the monthly payment rather than up front on the entire price of the car
- warranty coverage throughout the duration of your lease
- the option to return the car to the dealer or buy the car at the end of the lease
- avoid the opportunity cost of tying up your money in a vehicle
Leasing a Car: Disadvantages
It’s also important to understand the downside to leasing a car, namely:
- the longer your car is on lease, the higher your overall carrying costs will be
- you are restricted to a set amount of kilometres per year
- you have less freedom when it comes to servicing your vehicle and making any modifications.
Geoff Cudd from How to Buy a Car at the Best Possible Price, says that most of the time leasing a car is only a smart move when you can write off the payments as a business expense. Leasing a car for personal use will usually cost you more money than financing in the long run.
However, like renting a house for a few years, leasing a car can be a smart short term strategy for young families if you can’t afford to buy today. You might want to defer ownership if your financial picture will be different in a few years.
Leasing a car is certainly a reasonable strategy while you build up your savings. Just don’t use it as an excuse to get more of a car than you can really afford.
For young families looking for a safe new vehicle to get around in, leasing can help in the first few years while you get a handle on your finances. Make sure you have an exit strategy though – you don’t want to get trapped in a continuous cycle of financing or leasing a car.