Cars have often been considered the biggest purchasing mistake young professionals could make.The reason centers around the vehicle depreciation and its comparison to investing in appreciable assets like  homes and property.  As a result of slowing depreciation, quality vehicles and huge selections that fit any budget, cars are becoming more attractable investment options to our generation.

A car says a lot about the person driving it; however, what you don’t see is the financial obligation that comes with the shiny new ride. Consider these options with your own research when deciding to lease or buy an automobile.

Leasing

You often hear television commercials parade $199/month leasing options for 36 months with a small down payment due at signing. Just what a young professional wants to hear; Low monthly payments, small down payment and in 3 years you can trade for a newer vehicle.

Sweet deal for those looking to lease (rent) vehicles all their lives, but let’s say you decide to buy the car after 3 years because you loved it. Well you are now upside down in debt (owing more than it is worth). Think of it this way, most new cars priced modestly at 20-25K will run the person from $350-$550 per month depending on credit and interest rates.

So if you lease a car for the aforementioned terms, you have underpaid a minimum of $5,400 in three years add in depreciation and BOOM you have a 25K car that you still owe 18K on that is worth around 10K (email me for the math). Now you have to finance 18K to buy the car or throw away the $7,200 you paid in 36 months. OUCH either way!

Solution: Lease cars at the lease-to-own rate, not the introductory rate. This will protect you in case you decide to buy the vehicle. If you never want to own a vehicle, but prefer to drive a new vehicle, then just lease every three years. Think of it as an apartment you lease for a while just to move and lease again.

Other pitfalls: For those living in areas with minimal public transportation or long commutes to/from work, leasing will not be a good idea. Mileage penalties can become expensive and could possibly void your lease agreement.

Buying

When going to buy a vehicle you have two options; buy outright (w/cash) or finance (w/credit).  If you are like most young professionals, the idea of having another loan may not be worth the headache. You are in this dilemma because you know that if you finance a new vehicle, due to student loans, your rates will be higher or you may be declined.  So you look to buy a used vehicle, because your payments will be lower and you may be able to put a large down payment to have really low monthly payments.

Solution: Go with what you can afford. Having a brand new vehicle may be nice but the car payments can put a bigger strain on your financial health.  There are plenty of new cars that will fit tight budgets and may be a better option to used cars. If you decided to go used, be sure it is certified used  comes with the original warranty. Getting a used car without a warranty can make an affordable car unaffordable.

Until next time remember that financial responsibility is the key to financial empowerment!