Own or lease?

.

   By Guest Blogger Ryan Lewenza

.

As financial advisors we don’t just help clients with investment portfolios. We try to assist them with all of their financial needs. Recently, a client asked our view on whether to buy or lease a car as they were overdue for an upgrade. This is a perfect example of non-portfolio related questions we field from clients and the different ways we support them. Here’s our response for this important purchase.

Let’s first examine the market for new and used cars. Used car prices surged during the pandemic as auto production was greatly curtailed, but, as the pandemic receded and sales and production of new cars rebounded, used car prices declined significantly. For example, in the US the average price of used cars is down over 20% since the 2022 peak.

In Canada, used car prices have declined since mid-2023 due to the slower economy, higher interest rates and a rise in used car inventories. According to Autotrader’s most recent quarterly report, used car prices averaged $37,662 in February, which are down 4% yoy. As seen in the chart below, used car prices have been basically flat over the last few years.

New car prices, while off their recent peak, are still up 7.4% yoy, and averaged $66,422 in March. According to Autotrader, “The new car market, on the other hand, is still trying to catch up with pent-up demand. We estimate that 1.5 million fewer new cars were sold between 2020 and 2023, during the peak microchip shortage and supply chain disruption period.” This pent-up demand for new vehicles has been a key factor behind the dramatic rise in prices over the last few years (average new car prices are up over 25% since early 2022).

New and used Canadian car prices

Source: Autotrader

When buying a car there’s two key considerations – whether to buy new or used and how to finance the purchase.

Personally, I’m a fan of buying ‘pre-owned’ cars since you still get that feeling of a new car without paying full pop. It’s estimated that new cars depreciate 10% as soon as they are driven off the lot and decline 60% after five years. They are the definition of a depreciating asset.

Now let’s review the pros and cons of buying and leasing cars.

Leasing a car

Pros:

• Usually lower monthly cost (a monthly lease payment can be up to 30% less than a monthly finance payment)
• You get a new vehicle every three or four years (this is a big consideration for people who like new cars)
• Usually protected under warranty for the entire time you have the vehicle
• No need to trade or sell the vehicle when your lease is up
• There are tax advantages for business owners (you can write off a portion of the lease payments and other expenses associated with the car)

Cons:

• Limited number of kilometers (added charges for going over can be substantial)
• Properly maintain the vehicle to the standards of your lease
• End of lease charges
• You don’t own the car. You’re basically renting the car for a few years

Owning a car

Pros:

• You own the car so you have some equity in the car and flexibility
• Generally, it’s cheaper to buy and own a car versus leasing if you own the car for a number of years
• There’s no mileage limits

Cons:

• Depreciation, especially for new cars
• Higher monthly payments. Car loan payments tend to be higher than monthly lease payments
• Maintenance costs

Finally, things to consider when making the decision to buy or lease:

• How many kilometers you will be driving the car per year
• How much can you afford cash-flow wise per month
• Will it be used for personal use or business (possible tax deductions)
• How long do you expect to keep the car
• Current APR rates for financing versus leasing

Overall, if you plan to drive the car into the ground as I prefer to do, then buying a car is better than leasing as the long-term costs will be lower. This is especially true with buying pre-owned cars from a dealer. But, if you’re someone who likes a new car every few years and likes the flexibility that comes with leasing, then leasing probably makes the most sense.

So, owning versus leasing comes down to your personal preference, like everything else in life.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2024/06/15/own-or-lease/