Fall is the Best Time to Buy a New Car
Many people ask me if it is best to lease, buy new or buy a used car. As with most financial questions, it depends on your personal situation. In order to reach your financial goals, the general rule of thumb is to follow the 50, 30, 20 rule in your budget. 50% of your budget is allocated towards your Living Expenses; home, utilities, transportation, groceries, etc. 30% allocated toward your lifestyle expenses; vacations, shopping, restaurants, etc. The remaining 20% should be allocated toward your financial priorities; paying off debt, retirement, college, etc. How you allocate your funds within each of those categories is up to your personal preference. Meaning maybe you get more enjoyment out of driving the latest sports car than taking vacations in exotic places, then you should allocate more of your budget towards a car than vacations. Before deciding whether to lease, buy new or buy used here are the pros and cons you should consider.
To lease a car you pay a fixed amount monthly for 2 to 3 year terms. At the end of the term you can turn the car in and get a new car with a new lease. The pros include getting a new car every 2 to 3 years and the maintenance of the car is usually included in the lease. The cons are you don't own the car so when you are ready to turn it in there isn't any return of the equity you paid out each month on the lease. In addition you may have to pay a penalty if you go over the mileage limit of the lease. This option is great for the person who always wants to drive the latest car and doesn't drive a lot of miles every year. This option will cost you more money than buying a car.
Buying a new car allows you to get a return on equity when you want to sell it and you don't have to worry about how many miles you put on it each year. It's new, has all the bells and whistles and maintenance costs should be minor the first 40,000 miles or so. The cons include depreciation and paying for maintenance. As soon as you drive your new car off the lot, the value drops 20–25%. On a $30,000 car that's a loss of $6,000-$7,500. Ouch! Getting a used car avoids the new car depreciation penalty and in the long run will cost you the least amount of money of these three options. The downside is that the car will have some wear and tear, doesn't have that new car smell and won't have the latest technology.
There are ways to avoid the 20-25% depreciation penalty of a new car and still get a new car. One is to buy in the fall and take advantage of the year end clearance events. These cars are marked down because the dealers want to clear the lots for next year's models. Typically this will reduce the new car depreciation penalty to 10-15%. On a $30,000 car that reduces the penalty to $3,000-$4,500. An even better option is to buy a new car that still might be available from the previous year. In the fall of 2016 that would mean buying a new car from 2015, what the dealers call a "2 year old car." You may be able to avoid the new car depreciation penalty all together by buying a new, 2 year old car. It's easy to find these cars on Kelly Blue Book, www.kbb.com, just filter new car results in your area by model year.
If you are still unsure if the car is a good deal, call your financial planner. Its little decisions like these that can bring you that much closer to reaching your financial goals while still maintaining the lifestyle you want to have. Happy shopping.