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GOLDEN VALLEY, Minn. - Buying a new car is the second biggest purchase most of us make. Since many buyers finance their vehicle, deciding whether to buy or lease it can be confusing. Dan Ament, Financial Advisor with Morgan Stanley in Wayzata, joined KARE 11 Sunrise to discuss the pros and cons of different options.

Finding the right vehicle that fits your budget – Consider how much money you have available for your down payment including trade-in value if applicable and what monthly payment fits your budget. Ask what loan interest rate and term is available for your situation. You can input your data into this calculator to estimate what value of vehicle you can afford.

Leasing a new car – You get to use the car but must return it at the end of the lease, unless you decide to buy it.

Benefits:

  • Lease payments are almost always lower than loan payments because you're paying only for the vehicle's depreciation during the lease term, plus interest charges (called rent charges), taxes, and fees.
  • The future value of the vehicle does not affect you financially. You can return the vehicle at lease-end, pay any end-of-lease costs, and walk away.
  • You also benefit from minimal maintenance / repair costs with warranties typically covering the first 36 months.

Drawbacks:

  • You always have a car payment. You will never own the car, unless you 'buy out' the lease.
  • If you end the lease early, early-termination charges can be costly.
  • Most leases limit the number of miles you may drive, often 12,000 to 15,000 per year.
  • You are essentially paying for the most expensive years before a vehicle depreciates. At the end of the lease, typically two to four years, you'll have to finance the purchase of the car or lease or buy another.

Buying a new car

Benefits:

  • You own the vehicle and get to keep it as long as you want it. You can sell or trade in your vehicle at any time.
  • If necessary, money from the sale can be used to pay off any loan balance.
  • You're free to drive as many miles as you want. Keep in mind that higher mileage lowers the vehicle's trade-in or resale value.
  • You don't have to worry about wear and tear, but it could lower the vehicle's trade-in or resale value.
  • At the end of the loan term, typically four to five years, you have no further payments. You have built equity to help pay for your next vehicle.
  • The vehicle is yours to modify or customize as you like.
  • If you are trading a vehicle in, you avoid sales tax on the value of your trade-in.

Drawbacks:

  • Loan payments are usually higher than lease payments, because you're paying off the entire purchase price of the vehicle, plus interest and other finance charges, taxes and fees.
  • You will have to deal with selling or trading in your car when you decide you want a different one.
  • The vehicle will depreciate, but its cash value is yours to use as you like.As the vehicle ages, service costs will become a factor to consider (tires, brakes, etc.)

Buy vs. Lease Calculator – Do your homework and utilize "buy vs. lease" calculators to compare the specific numbers you are presented for the vehicle you are considering. Visit the following as examples to guide you:

Buying a used car – American's continue to own their cars for longer periods of time. The average age of a light vehicle on U.S. roads is 11.4 years, about unchanged from the previous year after climbing up since the "great recession."

Benefits:

  • You avoid the high cost years of owning a car, avoiding the higher depreciation rates typical in the first few years of ownership.

Drawbacks:

  • Additional potential maintenance and repair costs, especially once the car is out of warranty period.

Bottom line: The decision to lease or buy will always depend on your personal circumstances. If your objective is one day to be rid of pesky little car payments and you actually want to take ownership, buying a car may be the best option. If your goal is to drive a new set of wheels every three or four years and minimize your monthly costs, leasing a car may be a good alternative. Educating yourself about the two financing options will give you the confidence you need when you step into a dealer's showroom.

Dan Ament is a Financial Advisor with The Ament Group at Morgan Stanley located in Wayzata, MN and may be reached at 952-475-4302 or dan.a.ament@ms.com. To learn more about Dan Ament and his practice click: www.morganstanleyfa.com/amentgroup.

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