Cars are a funny thing. They are expensive, require regular replacement, and there are lots of options – it was all the options that made me think of Dr Seuss. Rather than telling you how I answer the question of “which car to buy?” and trying to convince you that my answer should be your answer, let me offer some general financial insight into the whole car buying/leasing affair.

Is it ok to take out a loan to buy a car? Yes. But be mindful of the value of the car vs the amount you owe on the loan. Put down enough to ensure you are never underwater on the loan. Also pay attention to the interest rate – whoever finances your loan will have to tell you the total cost of interest over the life of the loan. Are you ok with the amount? If not, find something cheaper.

Is it ok if I lease a car? Yes. Though generally speaking it is more cost effective to own a car if you buy it new and keep it five or more years. With a used car that time horizon shrinks. BUT, the point of leasing is to put the risk of ownership on someone else – the dealership. Gap insurance further solidifies that relationship by forgiving what’s left on the agreement if the leased car gets totaled. My only real word of caution is to be sure you aren’t trying to justify getting a car you wouldn’t normally be able to purchase. Leasing gets marketed as cheaper – so you can drive nicer cars. Don’t fall for it. A lease is a long-term rental agreement (debt) where you pay for depreciation AND interest that the dealership is incurring on the car you’re borrowing. In that regard it’s no different than ownership. The difference is there’s usually thousands due at signing and at the end of the lease you have nothing to show for. It’s only cheaper compared to owning a car over the same length of time (as in buying a new car every 3 years).

Is it ok to buy new? Yes. While new cars lose value very quickly, they have the potential to be safer, more reliable, more economical, and of higher quality. If you plan to keep your car for 5+ years the depreciation really doesn’t matter. It only matters if you end up trading it in earlier or it gets totaled.

What if I need more than one car? Build a plan to even out the cost over time. For example, in my family we have two cars. The plan is to buy new and keep them 10 years. But since I don’t have the cash to outright buy a car I stagger replacements so we get a new car every 5 years and only ever have 1 payment. To get the cycle going, you will likely have to play around with the timing of replacement. Give it time.

Is it ok to get a car from a luxury brand? I’ve already covered this in my post on luxury goods.

How much can I afford to spend on my cars? Despite all the advice out there, no one can answer that for you. There are lots of guidelines like “no more than 15% of your budget” but by now you’ve probably figured out I don’t like being proscriptive. What I can say is that I’m a big believer in life-cycle planning. There’s more to the cost of a car than its monthly payment. There’s insurance, gas, and maintenance. Plus repairs once it’s no longer under warranty. (There are gobs of online resources for calculating these costs.)

A word on depreciation. Depreciation slows down as your car gets older. Why not just buy an older car then? Because dealers mark the car right back up when they sell used vehicles! The impact of depreciation is only felt by you (the owner) and only when you sell or trade – that’s why I don’t really worry about it. Consequently, this is why dealers love leasing – they make a fortune on the lease and then make a fortune selling it after the lease. Bottomline: the longer you keep a car the less depreciation matters, whether you bought new or used.

That’s all for now. What topic should I cover next?