By Ashley Reich

I will never forget the time that I purchased my very first car. I was 17 years young, and I had been working many long hours to save up cash to purchase a vehicle to help me get to and from school and work. I remember finding a Honda Accord that was for sale in our area, gently used, and priced right at $2,000. I met the couple selling the car, handed over my hard-earned cash, and drove away in my “new to me” vehicle. Over the years, I have owned many vehicles. I have paid cash outright, leased several, and had both new and used vehicles. Personally, nothing feels better than driving a vehicle that I do not have a payment on, but whichever choice you make comes with pros and cons to consider, especially in today’s climate.   

Over the past two years, the car buying industry has completely changed. Before the pandemic, buying a car was rather simple in terms of a reasonable price and availability. Unless you have been hiding out on an island in the middle of nowhere, being able to find a car at a reasonable price or finding one in stock is next to impossible. According to a recent CNBC article, car prices are up 14 percent from a year ago, which is actually a slight decline from earlier in the year. Either way, you will be paying more for a car in today’s environment than ever before and it is hard to determine the best scenario if you must purchase a vehicle.

One of the unique aspects of buying a new car, whether financing or leasing, in today’s technologically enhanced environment is that most vehicles are made with a specific semiconductor chip. We saw at the beginning of the pandemic that we are still experiencing now that these semiconductor chips have been delayed significantly – otherwise known as the “global chip shortage.” In April, Newsweek reported that the chip shortage “will continue into 2023,” and it is mainly stemming from the pandemic and supply chain issues. Some car companies, like BMW, have decided just to begin shipping cars without the proper enhanced features just to get cars out of production and into the hands of consumers. It is still possible to find a new vehicle but drive past any car dealership in your local community, and you are going to see very few available new vehicles. If you do, it certainly will not be with all the bells and whistles most seek.

Let us pretend for a minute that we did not have any of the current issues with availability, and you were faced with a decision to buy or lease a vehicle. What is the right call to make, and what makes the best financial sense?

Option 1 – Paying Cash

Pros: Fundamentally, paying cash for a vehicle is going to be the best “bang for your buck” since you will own it outright, are not paying interest, and are buying that vehicle at a price agreed upon – nothing more, nothing less.

Cons: None. You own the vehicle outright and will not have any monthly payments.

Option 2 – Leasing the Vehicle

Pros: Leasing your vehicle allows for your monthly payments to be lower and makes it more attractive at the onset to consumers because they do not feel as though they are paying as much per month for the vehicle as compared to financing. Many car dealerships also cover the car in the form of a warranty and likely are covering oil changes and some other forms of routine maintenance checks.

Cons: At the end of the agreed-upon lease terms, you do not own the vehicle outright, and this type of arrangement can get you into a perpetual cycle of payments with no end in sight. Another downside is that you will be restricted to the number of miles driven within the set terms – although this may be considered less of a concern with more Americans working from home now than ever.

Option 3 – Financing the Vehicle

Pros: Financing a vehicle allows you to make monthly payments but own the vehicle in the end. Unlike leasing, you can typically negotiate with the dealership on the final price.

Cons: Usually, you are borrowing at a higher interest rate. It is important to remember that credit history and score are factors in your interest rate and your monthly payment. If you have a poor credit history, you will either need to retain a cosigner or have a significantly higher monthly payment.

New vs. Used Vehicle

Again, let us pretend we are still in a situation where cars are not scarce and prices are not sky high. A used vehicle may likely be the best option out there if you understand the risks. If you are someone that believes in the principle of paying cash for vehicles, no monthly payments, and not spending an outrageous amount of money outright, I would highly recommend buying a used vehicle. Many see used vehicles as a “money pit,” but most of the time, if you are taking care of routine maintenance, a used car can last a lot longer than most people expect. The downside to owning a used car is that you do not have a car warranty that comes with the purchase and provides more of a risk assumption model on the part of the consumer. Even still, most car warranties do not cover most of what you need when you have to use them.

Action Steps

In a more realistic scenario, if you do not have to buy a car right now, I would highly recommend waiting as long as possible, or at least until car prices begin to stabilize again. If you have an older vehicle, continue to do routine maintenance and required repairs and save up as much cash as you can to lower the price when you do need to buy a vehicle. If you know you want to finance a new vehicle at some point, take the time now to practice budgeting for the monthly payment you can afford vs. getting pressured into buying something you cannot afford. This practice will allow you to determine your comfortability level with a monthly payment and will allow you much more clarity when you go to find a car to purchase. Personally, I do not recommend a vehicle lease unless you want to continue to lease vehicles for an extended period of time with a low probability of buying a vehicle at some point. Although it may sound nice to get a new car every couple of years, it is simply not the best financial option on the market today. Thankfully, the current scenario will not be like this forever. Regardless of the situation, it is always best to be patient, research the best deal, ask for guidance from trusted, and do not make rash decisions on purchasing a vehicle – your wallet will thank you.