Everybody makes car payments.
Well that's not true, I hear you say, I always buy 'em 10 years old in good condition, and pay cash on the barrel. Nevertheless, you still make car payments. If there's a difference between what you paid for your car in the beginning and what you sold it for in the end, then you've made payments on it.
It's more than just that too. You car consumes fuel, oil, and tires month-on-month. It costs a fortune to insure. There's a servicing schedule. You might want to wash it now and again. The wipers need replacing. One of the bulbs went out.
Basically, as much as I love 'em, cars tunnel their way into your bank account and start draining it away dollar by dollar. It's not unlike home ownership with its taxes and plugged drains - except at least the house is rising in value. Unless you have a collectible like a carefully preserved air-cooled Porsche, a car is a depreciating asset that's reaching into your wallet every day it's on the driveway.
Now, you might think that I'm three sentences away from strapping on a pair of hemp pants and urging you to "Stop working for your car maaaan. Simplify!" Perish the thought. If I had my druthers, my house would look like the place from the old Justification for Higher Education poster, except with half the cars up on blocks. I'd have an entire fleet of crapcans if I could get away with it. But if we recognize that locking up thousands of dollars in a consumable is a reality of vehicle ownership, then a few things become clear. First, leasing isn't the waste of money some financial types would have you believe. Secondly, buying a brand new car instead of waiting for depreciation isn't that bad of an idea either. And lastly, sometimes the cheaper the car, the more expensive it is to own.
Let's look at the first example. Right now, if you're looking at anything from the German brands — BMW, Mercedes-Benz, Volkswagen — they're all trying to cut each other's throats on the monthly payments. It's a segment where many people already think about monthly outlay rather than tying the whole wad of cash up, and the battle between the 3 Series and the C-Class can come down not so much to incremental differences in ride, handling, and acceleration, but which one has the cheaper payment.
But let's look at something simpler, the VW GTI. I love the current GTI — I think it's one of the most competent do-everything cars on the market right now. It's fast enough to be great fun, comes in a four-door to haul your kids, is super comfortable, and has a stick-shift for the die-hard enthusiasts or a dual-clutch gearbox for those battling traffic.
However, it's expensive.
I spec'd out my ideal car — cloth seats, a stick-shift, four doors to haul the kid — and the total was more than $40K, after fees and taxes. Mein Gott! Who has that amount of Deutschmarks just lying around?
Or I could trade in a theoretical early 2000s car (there are tax savings in doing so on a lease), and suddenly it's $400 a month. That's still not cheap, but here's the other part about leasing that people seem to gloss over. It's not just the niceness of having a new shiny car, it's the constancy of the pricing. Covered by warranty, that GTI will be $400 a month, every month.
No sudden $1,000 repair bill to replace some unpronounceable part. No getting stranded by the side of the road and having to fork out for towing. No being late to a client meeting because your always-a-project GTI with the sweet rims decided to throw a wheel bearing, meaning a week's work goes up in smoke. The lease is a known expense.
Plus you might be able to write some or most of the payment off, if it's a company car.
"Says here you own a bakery, Mr. Smith. And your delivery van is a Porsche 911 Turbo S?" "Yep. Freshest rolls in town!" So don't count out leasing just because some people like to compare it to renting. Modern cars are expensive and complicated, and can be costly to maintain when they start getting a bit old. There are few deals to be had on a 15-year-old AMG product, for instance. Let's take another example, one where financing is being considered. Conventional wisdom suggests that buying a car after it's one year old or so, with the initial off-the-lot deprecation having taken a hit, is the best way to do it. I would invite those that think so to try to buy a hatchback Subaru WRX just now. Good luck. Trolling through the various online sources shows that there are nine hatchback WRXs for sale from 2011 up. Nine. In all of Canada. And many of the back-East ones look like they just finished a particularly difficult rally stage.
Buying a year-old Corolla or Camry is sometimes doable, but for harder-to-find stuff, there's always a reason that the car is getting traded in. In addition, if the resale is good enough, then the initial depreciation is somewhat made up for by the access to low financing rates, an extra time period of warranty coverage, and the benefit of driving the car for an extra year. Initial first-year depreciation doesn't matter if you plan on keeping the car for 10 years.
What's more, many of us have mortgages or investments, or places where our money might better be spent. Borrowing from the car companies at a fixed rate can make planning easier, and they're often ridiculously aggressive on rate plans. Many of the mainstream manufacturers often charge no interest for shorter-term loans, and if I handed you the cost of a car in sacks of loonies and toonies, you'd probably be able to make interest on it over the course of a few years.
There are other, more complicated considerations here too, so be sure to talk to your accountant, but I do have one final piece of advice. If you take away two statements here, let them be that 1) Everybody makes car payments, and 2) Cash is no longer king.
If you're buying a clunker from the classifieds, that's one thing. If you're negotiating at a dealership, it doesn't make one whit of difference whether you pay in stacks of John A. McDonald's, or lease it for six years: the dealership doesn't care. They get paid the same no matter how you pay for it, and where third-party finance comes in, actually get paid a little more.
Cars are better than ever, but they're also more expensive than ever, so don't shut off a line of enquiry simply because of a prejudice against leasing or financing. Everybody makes payments on their car — make sure you're making yours in the smartest way possible.
