User:Fyre4ce/Cars

This article describes the financial considerations surrounding buying (or leasing) and owning cars.

Costs of car ownership or leasing
Depreciation Opportunity cost of equity Interest/cost of money Transaction costs Registration and taxes Fuel Maintenance Insurance Parking

Leasing
Basics of leasing

Advantages
For those who have already decided to get a brand-new car every few years, leasing may offer the following advantages over purchasing:


 * Lower down payment and monthly payments, because no portion of payments goes to building equity. Although this may not be a wise long-term strategy, it may be advantageous for those temporarily on a tight budget.
 * Streamlines the process. Both the sale and the buy-back are negotiated up-front, and you deal with only a single party (the dealer), avoiding the time and hassle of selling the car yourself later on.
 * Potentially lower transaction costs compared to buying and later trading in
 * Depreciation risk transfers to the dealer. At the end of the lease, if the car depreciated more than expected, the dealer absorbs this shortfall when they take the car back that is worth less than the residual value. On the other hand, if the car depreciated less than expected and the lease includes a purchase option, you can exercise this option and resell the car yourself at a profit.

Disadvantages
The biggest disadvantage of a lease is that it commits the lessee to the most expensive way to own a car - turning over a new car every few years. Compared to buying a new car, leasing may also have the following disadvantages:


 * The smaller payment can lead buyers to lease a more expensive car than they should, as dealers are known to market to customers based on a given monthly payment
 * More complex than purchasing, and some of the costs are more hidden (eg. cost of money), which favors the dealer in the negotiation
 * Difficult to terminate early
 * Mileage limitations - low-mileage drivers pay for miles they don't use, and high-mileage drivers pay steep over-mileage fees. Low-mileage drivers may be able to recoup some of the unused value with a purchase option.
 * Dealers are known to charge above-market costs for repairing scratches, dings, and other defects when the car is turned in, and lessees are in a poor position to negotiate these costs.

"Don't buy a depreciating asset" myth
Some people, usually those trying to sell a car lease, claim that you should lease rather than purchase because you should "buy an appreciating asset, lease a depreciating asset" or something similar. (In this context, "depreciation" refers to a decline in the market value of a piece of property (ie. the car) over time.) This sounds like wise financial advice, but is actually highly misleading. Whether you own an asset outright, or lease it at a fair price, you pay for the deprecation costs either way. If the rate of deprecation is known with reasonable confidence (and dealers have access to pricing data for millions of cars, so it is to them), the depreciation is baked into the lease rate, so this is not an advantage of leasing. In fact, leasing maximizes the depreciation you pay, because you have the car for the period of time when depreciation is highest. Buyers concerned about depreciation costs should buy a new car and drive it for longer than a few years, buy a used car, or use other forms of transportation that don't require paying for the depreciation on a car.

A more accurate version of this advice could be, "lease, rather than buy, an asset you only plan to need for a short time, and which has high transaction costs." This is why it's better to rent a home than to buy one if you know you're only going to live in it for one year. Cars have lower transaction costs than houses, but if you know you're going to want a new car every few years, leasing can be slightly less expensive than buying new and trading in, due to lower transaction costs.