Law #12: Explore Transportation Options Before Committing

The Law

For many families, the cost of transportation can rank among the highest costs in your budget. How you choose to get around can impact your overall financial picture significantly. Understand your transportation options to decide between buying, leasing, or pursuing other opportunities like ride-hailing.

Your Keys to Power

OPTION 1: Leasing. Leasing a vehicle is like renting it from the dealer for a particular time. Most leases range from 36 to 48 months. You can return the car to the dealership at the end of your lease period or purchase it for a predetermined amount defined in your lease contract. With a lease, you never own the car and therefore never take the title into your possession.

  • Pros

    • Lower monthly payments. The monthly payments for leases are generally considerably less than the payments for a car loan, and so is the down payment. You may even be able to get a much more luxurious car on a lease due to more economical payment options over the monthly cost of a car loan.

    • Get a new car regularly. Some people enjoy the feeling of getting a new car every few years. If that’s you, leasing may be a good option. When your lease is up, you return the vehicle and pick out your next one.

    • Easy maintenance. Lease contracts often include coverage for certain types of repairs and maintenance, eliminating the potential hazards of unforeseen repair expenses.

    • Possible tax deductions. A lease may offer better tax write-offs than a car loan if you use your car for business purposes. The IRS permits you to deduct the financing costs and depreciation parts of the monthly lease payments, which could lower your taxable income.

  • Cons

    • You don’t build equity. With a lease, you aren’t paying money to own a vehicle. Instead, you’re essentially renting it. You, therefore, do not build any equity in the car.

    • Even with lower monthly payments, the overall cost can be higher. Leases introduce fees not customary in car loan agreements, like acquisition fees (AKA lease initiation fees) and end-of-lease fees like charges for abnormal wear or additional mileage on the vehicle.

    • Less flexibility. Lease contracts often prohibit certain types of customization options available when you purchase a car. You may have to reverse any modifications you make before returning your vehicle at the end of its lease term. Leases also come with preset mileage. You’ll pay a fee if you go over the mileage in your contract.

    • Gap insurance risk. In the unfortunate circumstance that you total your car in an accident before your lease is over, you may be stuck with expenses that aren’t covered by your car insurance unless your lease contract includes gap insurance.

    • You’ll always have payments. Consider other options if having car payments forever sounds less appealing to you.

    • Insurance costs. Your insurance will generally cost more with a lease than buying a new or used car.

OPTION 2: Buying new. Buying a car is like buying anything else—when you finish paying for it, you own it. Most people finance a vehicle with an auto loan from a bank or other lending institution, although some are in the fortunate position to purchase a car upfront in cash. Either way, once the last transaction completes, the vehicle is yours, and you receive its title.

  • Pros

    • You build equity. When you buy a car, you build equity in it. That means you'll end up with a vehicle that you own entirely.

    • Greater flexibility. You don’t have to worry about mileage caps when buying a car. You’ll also have the option of selling your vehicle at any point.

    • Customization options. If you enjoy customizing your car, a purchase may be right for you. If you want to add a stamp, wrap your vehicle, or add other after-market features, it’s ok because you’re buying it.

    • Simpler contracts. While financing and leasing contracts are complex, financing contracts are often far more straightforward.

    • Lower insurance. Insurance on a financed car will often cost less.

    • Payments end. After you’ve paid the loan off, you don’t have more car payments.

  • Cons

    • More upfront costs. Sometimes you’ll need a larger down payment to secure a loan, or you may wish to pay for your entire car upfront, which will eat into your cash.

    • The vehicle depreciates. In most markets, a new vehicle can depreciate rather quickly. The future value of your car is unknown. While used cars are going for higher than expected due to the circumstances impacting the market from the pandemic and ensuing supply chain issues at the time of this issue, these high valuations for used cars are uncommon.

    • Potential maintenance expenses. When the manufacturer's warranty ends, you’ll be responsible for fixing your vehicle, which can be costly.

OPTION 3: Buying used. Buying a used car is very similar to buying a new car. You’re still putting money into a vehicle, which means you'll eventually own it. We distinguish between buying used or new cars because there are different benefits and drawbacks to explore.

  • Pros

    • Reduced overall expenses. A used car’s lower market value means your initial acquisition costs will be lower when purchasing a used versus a new car. If you go with a certified preowned vehicle, you may have the financial benefit of a warranty while buying used and have the features and benefits of a newer model.

    • Cheaper insurance. Insurance costs are typically lower on a used vehicle. You can use those better rates to save money or get better coverage.

  • Cons

    • Factory customizations are limited. When you buy a new car, you can often choose the features you want upfront knowing you’ll get a vehicle with those features, or you can order one from the factory and have it manufactured to your spec. When you buy a used car, however, you're limited to whatever the vehicle has, which means you may forfeit features that you like, such as sound system options, interior or exterior color choices, and whether it has a sunroof. Essentially, a used car comes as is. While you could get the vehicle painted, that would be an added expense.

    • You'll often pay for maintenance and repair costs. New cars come with a manufacturer's warranty that covers a lot of repairs, but most used vehicles don't come with this type of warranty unless you opt only for certified preowned vehicles with active manufacturer's warranties. If you get a car without a warranty, you'll pay for repairs and maintenance out-of-pocket, or you'll have to purchase your own extended warranty from a dealer.

OPTION 4: Ride-hailing. You’ve undoubtedly heard of ride-hailing behemoths like Uber and Lyft. While you may have used them to taxi to and from the airport, have you ever thought of giving up your car and dedicating your transportation budget to ride-hailing? Depending on where you live, this is an option. In the earlier days of these apps, particularly before you could schedule trips in advance, the plunge was a bit more daunting. But now, with apps that grow more sophisticated every quarter and new business features rolling out to make these apps more attractive to commuters and entrepreneurs, it’s a real possibility.

  • Pros

    • You pay one price. With services like Uber or Lyft, you'll pay a single fee for rides without worrying about gas, insurance, car or lease payments, maintenance, or parking.

    • It frees your mind while on the road. While it’s good to pay attention even when someone else is driving, you’ll be in the back seat and have a certain freedom that could lower stress. You can work in the back seat, rest, take work calls, or have great conversations with drivers.

    • It could be cheaper. Depending on how much you drive, going all in on ride-hailing may be cheaper. If you seldom drive, maintaining a car of your own (unless you’ve already paid it off) could be more expensive.

    • Your health may improve. Walking becomes much more common when you rely on ride-hailing than hopping into the car in your garage. You may start opting to walk to nearby destinations and walk a bit more when your ride-hailing drivers pick you up or drop you off.

  • Cons

    • Increased risks. Although many rides end without a hitch, there are still situations where riding in someone else’s car can be unsafe.

    • Inconvenience. Ordering cars and waiting for someone to arrive, not being able to store things in your trunk, and not having immediate access to a method of transportation can be less convenient than having your own car.

    • It could be more costly. If you drive a lot, this option could cost you significantly more. You’ll need to dig deeply into your driving patterns to know if this point is a pro or a con for your specific situation.

Practical Application

  1. Consider all of your options. Don’t get backed into a single option because that’s all you know. If you’ve leased a car for the last ten years, only continue leasing if you know it’s still right for you. Don’t just do it because that’s what you’ve always done. Do your research to determine if purchasing a vehicle for the next phase of your driving and financial life makes more sense.

  2. Do the math. If you’re seriously considering ride-hailing as a solution for your transportation needs, check out these fare estimators by Lyft and Uber.

  3. Don’t get boxed in. If you have a lease, most car dealerships will start to hound you in the last 6 to 9 months of your lease to get you to turn that vehicle in and jump into a new lease. Don’t be swayed by the pressure of these tactics. Think well in advance about what you plan to do and how your lifestyle may change in the future to make a wise decision.

  4. Pay attention to the market. When purchasing or leasing a vehicle, check current interest rates, car supply, and the going rate for any vehicle you may be trading in or selling on your own. If you have the pleasure of searching for a car in this current market, you know how much these things matter.

  5. Figure out your lifestyle and how your vehicle choice will impact it. If you live in a big city with access to several ride-hailing options like Uber, Lyft, and easy car rentals for longer road trips, you may be able to get away without having a car. In today’s age of newfound freedom, with many companies allowing workers to clock in remotely and even making those options permanent, you may be in a situation where you could choose to move to areas that make not having a car a possibility. On the other hand, regardless of your work commute, you may have a lifestyle that requires ready access to your own vehicle at all times, and that’s ok too. Discover the various lifestyle choices that impact your need for a car, and get creative.

  6. Consider a broker. If you do decide to get a car, consider a broker. The results and experiences are mixed depending on your specific situation, with varied success when negotiating car leases and purchases. Nevertheless, a broker can make things much more convenient, especially if they help navigate the paperwork, facilitate trade-ins, and help with vehicle delivery.

Authority

  • “Relationships, like cars, should undergo regular services to make sure they are still roadworthy.” - Zygmunt Bauman

  • “Older cars tend to drive like older cars. That is not for me.” - Robert Herjavec

  • “I look both ways before crossing a one-way street. That’s how little faith I have left in humanity.” - Tom Hardy

  • “The car was invented as a convenient place to sit out traffic jams.” - Evan Essar

  • “If I put 3,000 miles a year on my car, that's a lot. If I buy them, it just doesn't make sense, so I lease them, and my company writes the whole car expense off.” - Don Felder

  • “You always hear the phrase, money doesn't buy you happiness. But I always in the back of my mind figured a lot of money will buy you a little bit of happiness. But it's not really true. I got a new car because the old one's lease expired.” - Sergey Brin

  • “We're just blobs now - we're so worried about how we can keep paying the lease on the car, the mortgage, the lease on the toaster and all that. You can't really think about much else. If you lose that, you lose the whole lot.” - Rupert Everett

Our Vote

I have had experiences with all but one of the options in today’s issue. I purchased certified preowned cars for my first two vehicles. My third car, which I picked up while I still had my second used car, was a new vehicle lease. My fourth car is also a lease. These different options served me differently at different points in my life. When heading to college, I purchased a used vehicle that was sufficient for my needs at that time. I paid the car off and drove it for several more years. I passed it on to someone else when I was done with it.

The second car I purchased was for my first few years after college. I paid that vehicle off, built my credit substantially with excellent payment history, and drove it for several years. After I started to make a more reliable income, I moved on to leasing a vehicle that required ongoing payments. Leasing allowed me to have a fresh style with minimal worries about maintenance. Something is refreshing in the experience of leasing vehicles where I can take it back to the dealership, hand the keys over, and tell them to call me when it’s fixed.

I used a broker on my most recent car lease, but I’m not sure I’ll do it again. I appreciated a lot of aspects of the convenience—I never went to a dealership or even talked to a dealer about anything—but I don’t know that he negotiated anything any better than I could have. I customized my car significantly at the factory and shipped it from Germany, so negotiations typical for vehicles on the lot were just not an option. Had I been getting a car on the lot, I think I would’ve been more impressed with his services.

I also spent an entire year in Los Angeles navigating the city only with ride-hailing services and my feet. That was one of my year-long experiments to test myself—I wanted to see if I could give up driving for an entire year. I learned a lot, saw a lot of parts of the city, had a lot of great conversations, and also learned what I enjoy and don't enjoy about driving. Luckily, I did that experiment several years before the Covid pandemic.

Reversal

Given the staggering cost of transportation, there is no reversal to this law unless you don't need a vehicle at all. Some people live in highly walkable cities with fantastic public transportation like subways and bus routes. We adore a walkable city, and if you happen to live in one and don't need to tow many things or people around, that's amazing! You're good to go with several pairs of comfy shoes and maybe a bicycle.