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Buy or lease? Maybe one of each

Buy or lease? Maybe one of each

| June 17, 2021

When it comes to personal finance, I like to focus on the "big rocks". I don't sweat the small stuff, like cups of coffee or a good book. But when it comes to big ticket items like housing or transportation, you can bet I'll sit down with a beer and a spreadsheet, and map out every possible scenario!

My approach to vehicles has been to buy someone else's lease trade-in, drive it for about six years, then trade that vehicle in for someone else's lease trade-in and repeat. We'd use the same approach with my wife's vehicle, but stagger the timing so that about every three years, one of us was trading in and starting a new payment on a great used vehicle.

This setup has allowed us to only have one payment at a time, and always be driving a vehicle that was at worst about eight years old. In some cases, we'd even pay the loan off early and have zero payments for a year or two!

  1. So when I suggested to my wife that we lease our next vehicle (gasp!), she couldn't believe her ears. Here are the highlights that brought me to this point:
    my "staggered purchase" method failed, and we currently have two vehicles both approaching 100k miles at eight and nine years old, respectively. Oops.
  2. I think I want a truck. Living near the woods has allowed for (or required?) a lot of projects where I have found myself having to borrow a vehicle. I hate borrowing things! So a truck would be helpful, but frankly I'm not sure I'm going to like driving one. I haven't driven a truck regularly since my 1988 Dodge Dakota I bought for $2,300 of hard-earned cash (thank you Frankenmuth Fudge Kitchen) back in high school. If I don't like the truck, leasing gives me an easy "out" at the end of the term.
  3. The used vehicle market, just like the housing market, is crazy right now! Buying someone else's lease trade-in truck would be way out of our usual used-car budget. But with the current market conditions, our proposed residual value (i.e. the amount you can buy the vehicle for at the end of your lease) is almost $10k lower than the current used trucks on the market!

So I crunched some numbers, and a lightbulb went off: trade in both of our current vehicles; buy one used, and lease the other.

With our trade-ins, the equity from one vehicle will go as a down payment on the next, just like normal, giving us a reasonable payment on the loan balance. But because it doesn't make sense to put a large down payment on a lease, I can stick our second vehicle's trade-in value in a savings account, and use that to cover almost all three years of the monthly lease payments on the truck.

Three years from now, the purchased vehicle will (hopefully) be paid off, and the lease on the truck will be over. At which point, I can buy it at the lower residual value available from the lease agreement (or buy a different vehicle if I don't like the truck), and be back on to my "staggered purchase" plan as originally intended. That said, my long-term plan is still based upon buying, not leasing! But I'm curious to see how leasing goes.

I work with clients on scenarios like these every day. While I think this approach makes sense for me (check back in three years!), this is not to be considered advice, and may not be the right fit for you. In my opinion, leasing is a luxury, and each scenario should be looked at on an individual basis.

Buy or lease? Why not one of each? Let me know what you think.