Important considerations when buying a car vary from person to person. For some people, switching a car every three years is important, to keep up with the technology or purely for the “flash factor.” Others simply require a vehicle which will reliably get them from point A to point B. However, within an individual’s unique set of considerations, some financial options are better than others. Aside from buying a house, a car is likely the second largest purchase that you will make. Furthermore, cars depreciate in value relatively quickly. These are two excellent reasons to carefully consider your options when buying a car. 

New Versus Used Cars

First of all, should you buy a new car or a used car? Edmunds recently conducted a study on the Ford F-150 which showed that a brand new F-150 costs about $50, 000 whilst a year-old F-150 costs a little under $40, 000 — a 25% depreciation. In the second year, the F-150 further depreciates in value by an additional 7% and in the third year, by an additional 5%. In the fourth year, there is another plunge in the value of the car, because this is when manufacturer warranties tend to expire. 

Thus, if you are the sort of person who switches cars every couple of years, you might consider buying a year-old car, and selling it when its warranty expires in its fourth year. This gives you relatively lower depreciation. If you plan on keeping the car for a longer period, say 10 years, you can still buy the year-old car, and then just keep on using it. You would still avoid the worst of the depreciation. 

Buying Versus Leasing

With regards to buying versus leasing, buying is often the better option, because at some point, payments stop and you own the car, whilst leasing is more akin to renting the car. However, if you are leasing a car for business, the tax benefits might be attractive enough to outweigh buying a car. Another option is to get a SmartLease, which gives you the option to buy the car out at the end of the lease, without paying an additional sales tax. Under a regular lease, to buy out the car, you would need to pay the sales tax both at the beginning and at the end of the lease. 

Paying in Cash Versus Financing

Finally, should you pay for your car in cash or finance? In a high interest situation, paying in cash would clearly be the better option. But car loans these days often have interest rates of 2% or less, making financing quite attractive. 

Regardless of the loan interest rates available, it is financially wiser to define “affording” the car as having the means to pay for it in a lump sum, rather than having the means to make monthly payments. This will help you to avoid accidentally spending beyond your means. Even if you decide to take a low interest loan for your car, store the lump sum cash for your car in a designated bank account and let it accumulate interest. Simply put, avoid spending money that you do not have.