Part 1 – Buying
When you need to get a new car, you will be offered a choice of two different ways to put yourself behind the wheel: buying the car or leasing it. There are positives and negatives associated with each of these options, and the choice you make depends on many different factors. There are also certain business and tax-related aspects to consider when buying or leasing a car.
In Part 1 of our story, we will dig into the car buying process – what’s good about it, what’s not so good about it, and whether it makes sense for you, given the specifics of your situation.
Let’s define what buying a car means
Buying a car involves paying a negotiated price for that vehicle and receiving ownership of it in return. The actual elements of that payment can include one or more of the following:
- Trade-in value of a car you already own
Some people are able to pay cash for the total price of their new car, but most will need to finance the majority of the purchase by getting a car loan. Financing allows you to spread out the monthly payments over several years, keeping each payment affordable. While you are making these payments, your financing source shares the ownership of the vehicle with you. Once you have made the final payment, you get total ownership of the vehicle.
What’s good about buying a car
There are many positive aspects related to owning a car. Let’s go down the list:
It’s all yours
When you buy a car, you own it. Many people like that feeling. You also get the potential benefit of a period of payment-free ownership, once that you have paid off the loan. That’s an even better feeling!
You have no mileage limits
If you need to drive a large number of miles regularly, then you may be better off buying your car. Unlike with leasing, buying never comes with any mileage limitations. Drive as much as you need to – it’s not a problem!
It will have a trade-in value
When the time comes for you to buy your next new car, you can use your present car’s remaining value to reduce the purchase price. Whether you trade it in to the new car dealer or sell it separately, you will get some cash value back.
You can personalize your car if you choose to
If you are the type of person who likes to make their car unique, you have free rein when you buy! You can add aftermarket wheels and tires, a body kit, performance upgrades, or a custom paint job. It’s all OK!
You can sell your car at any time
If circumstances arise that require you to sell your car, you are free to do so. A lifestyle change may require a different type of vehicle, you may be moving to a city where car ownership is too expensive or impractical, or some other factor may dictate the sale of your vehicle. Unlike a lease term which you are locked into, you can sell your car whenever it becomes necessary.
Financing allows for more flexibility if your credit score is not the greatest
Leasing companies prefer customers with top-tier credit scores, while financing is usually more widely available to those who have average credit ratings. If you fall into this category, you may find that you are more likely to be approved for a loan than a lease.
What’s not so good about buying a car
There are some downsides to buying a car. Here they are:
Your payments and your down payment will usually be higher
When you are buying, you are purchasing the entire vehicle (leasing charges you only for the part of the vehicle that you use during the lease term). You will also pay much more interest and sales tax, for the same reason. As a result, buying costs more than leasing.
After the warranty ends, you will be paying for repairs
Most vehicle loan terms are longer than the length of the average warranty. This can expose you to the high costs of major repairs that become necessary after the vehicle’s warranty has expired – but before the loan is paid off! This can make a big dent in your wallet!
If you trade your car in before it’s paid off, you could end up “underwater”
Due to smaller down payments and steadily increasing vehicle prices, vehicle loan terms today are getting longer and longer. The average new vehicle loan term has grown to nearly 72 months. This means that the value of your rapidly depreciating vehicle is worth less than the loan balance, right up until the loan is nearly paid off.
If you trade in your vehicle, midway through your loan term, to get a new vehicle every few years, this “negative value” could total several thousand dollars each time you do it. You now have to add all those thousands of dollars to the loan you on your next new vehicle, just to bail yourself out of the previous loan. This is what “being underwater” means. It increases the amount you are borrowing to get into the new vehicle and will also increase the payment and/or the term of your new loan. You are digging a very deep hole of debt that you may never get out of, especially if you repeat the process every few years. This is extremely bad for your financial health and is definitely something to avoid.
You have no way of knowing your car’s value at any point
There are many factors that affect a car’s value. Some things, like market conditions, the state of the economy, and your brand’s reputation for reliability (positive or negative), are beyond your control. But other things, like your car’s mileage, mechanical condition, and cosmetic appearance, are a result of your ownership style. Your car’s value at any point in time is an unknowable blend of all these elements. Bottom line: you can’t know what it will be worth until that moment comes.
Some handy tips when buying a car
Here are some ways to make the car-buying process easier and hassle-free:
Get pre-approved for your car loan before you visit the dealer: Dealers make additional profit by marking up the interest rates on the loans they provide to car buyers. You could pay thousands extra in interest when you finance through the dealer. Be smart and get pre-approved for financing through Lendbuzz first, then shop with confidence at any dealer you choose!
Check for manufacturer’s incentives available for the cars on your list: Visit the appropriate manufacturers’ websites and check under “Offers.” There you will find all of the current incentives available for each model in the manufacturer’s lineup. If there is a cash back offer, you can use it to reduce the cost of the vehicle, or possibly as a down payment. Be aware of any restrictions and expiration dates.
Test drive each vehicle to be sure it works for you: You will be owning the vehicle you choose for several years, so be sure to take each of your potential candidates on a thorough test drive. Different makes and models will drive very differently, so it is important to find the ones that feel right to you. Try to find an area with a variety of road surfaces and driving conditions where you can take and compare every car you test-drive. Drive each vehicle on both streets and highways, and make sure it checks all of these boxes:
- It is comfortable and fits you
- It has enough space for the people and stuff you will be carrying
- You can see out of it clearly in all directions
- You can understand and operate all of the controls and features
- It has adequate power for keeping up with traffic and merging onto a highway
- It changes lanes responsively
- It brakes quickly and smoothly
- It corners and turns in a controlled manner, without excessive leaning
- It rides comfortably and handles bumps well, with no excessive pitching and jouncing
- The transmission shifts smoothly
- The climate control system is easily adjustable to your preferred temperature
- You can operate the infotainment system without undue distraction
- It comes with a good warranty (the longer, the better)
Test drive dealers as well as cars: If you like a car after driving it, check out the dealership before you buy. And unless you live in a sparsely-settled area, you can usually also find at least one additional dealer of the same new-car brand nearby. Shop all of these dealers not just for price, but also for service.
How good is their service department? How are their Yelp reviews? Are they conveniently located? Will any of them give you a loaner car or other transportation when you need service? Do they have a comfortable facility with refreshments, entertainment, and internet service if you will be waiting? Weigh these factors when you decide where to buy your new car – you will be seeing them periodically for many years!
Business and tax considerations of buying a car
Generally speaking, if you buy a car and use it for business, you can deduct the business-related expenses on either a per-mile basis or an expense basis. Parking fees and tolls may also be deductible, along with the interest on your car loan. If you use the vehicle exclusively for business, you may be able to deduct all of these expenses. But if you use the car partly for business and partly for pleasure, you can deduct only the proportion of the vehicle’s use that was for business purposes. There may also be other tax considerations when you sell a purchased business vehicle. Consult your tax advisor for specific guidance for your individual situation.