Before you get behind the wheel, you have a decision to make. Is owning a car the most practical driving option –– or would leasing a vehicle suit you better? Could renting be the savvy choice –– or is car sharing by the hour a more natural fit for your lifestyle? Here, we size up each car option to help you make a smart financial decision.
An important consideration when deciding whether car ownership is right for you is determining how many miles per year you’re likely to drive, says Philip Reed, automotive writer for NerdWallet. More than 12,000? You may want to think about owning a car. Less than that? Then leasing, or even renting, may make more sense. Drivers who rely daily on a vehicle may find that buying a car and then driving it as long as it can be kept in good condition could save money in the long run, notes Reed.
If you do decide to buy a car, the next step for most is obtaining car financing. However, shopping around for the best auto loan can be a difficult task. Reed's advice? Get pre-approved financing from your bank, something that can be done online. "It can help simplify negotiations and put you in a stronger position," he explains. That’s because doing so can help provide you with an accurate picture of your financial health, including your credit score, so you’re aware of your financial standing before going into the dealership.
The loan terms you’ll receive will most likely be influenced by your credit score, notes Lee Gimpel, co-developer of The Good Credit Game, a financial education tool used in colleges and non-profit organizations. The better your score, which reflects how responsibly you manage credit and pay your bills, the better your rate. "What often surprises people about their credit score is that it doesn't incorporate factors such as how much money you make or have in the bank," says Gimpel. How reliably you pay your bills influences your score more than any other factor, so if you anticipate needing an auto loan in the not-too-distant future, it’s wise to focus on building a good credit history.
Leasing has been steadily gaining in popularity with drivers, in fact according to Experian Automotive, a third of all new car transactions at the end of 2015 were leases. While terms differ from lease to lease, one draw is the lower upfront cost. If you don't have the down payment needed to buy the car you want, it may make sense for you to lease it. Lease payments are usually billed monthly, similar to the way in which one would pay a car loan. If having state-of-the-art technology and the very latest model are important to you, then leasing may be extra appealing.
The caveat is mileage. According to the Board of Governors of the Federal Reserve System, most leases limit the number of miles you can drive (usually between 12,000 and 15,000 per year). Request to increase that limit, and you could be making a higher monthly payment. And at the end of the lease, general wear and tear, such as scratches or upholstery stains, could also result in additional costs when you turn in the car. For a primary vehicle that's going to spend a lot of time on the road, leasing may not be the right choice. But for a second car that won't see heavy use, it can be worth looking into.
City dwellers with accessible public transportation usually opt out of both car owning and leasing. Renting can be the answer when a weekend trip is on the horizon. "If you regularly rent from the same agency in your neighborhood, build a relationship with the staff," says Reed. "It could greatly improve your experience." Your loyalty may lead to perks, too, like free upgrades or being alerted to current promotions that you weren't aware of. Keep in mind that rental rates, like airline fares, fluctuate greatly based on the day of the week and time of year.
Kaitlin Ahern of New York City relies on the occasional rental car. Her tip: always return the rental car where you picked it up. "Companies can charge a fee if you return a car to a different location. With that, I always make sure the rental location is as convenient to public transportation as possible, so I can get there and back easily," she explains.
Whether or not renting is the option that makes the most financial sense for you depends on several factors, including how often you drive, how far you typically drive, and how feasible it would be to affordably park a car you own or lease.
If you do go with renting, your credit card may offer perks. "Recently, we've seen some very attractive incentives on credit cards," says Reed. "It's important to know whether or not your credit card provides you with included auto insurance – and what types of insurance and coverage limits are offered – when you rent a car." If it does, you should evaluate whether the insurance types and coverage limits offered by the rental company duplicate what you already have through your credit card, so you could skip buying insurance through them. . Just make sure you're comfortable with exactly what's covered in the policy. And be careful if you're traveling overseas: some card issuers have a list of countries in which they won't insure rental cars, so double check that the country you're traveling to isn't excluded by your card issuer.
Car-sharing services are another alternative for the occasional driver. Such companies allow members to drive cars, which can often be found parked in their own neighborhood, by the hour or day. Since car insurance and gas are often included, this can be a hassle-free way to get up and go when you need a car.
To take part in car sharing, you need to apply for a membership, which comes with a monthly membership fee. Additional costs associated with car sharing are related to your use of the service, and, depending on the company, can be a per-mile, per-minute, or per-share charge. Once approved as a member, you're sent a card that allows you to unlock and lock the cars. A mobile app, which shows you where nearby vehicles are parked, can grant you "keyless" entry to the car as well. Cars are parked in marked spots in neighborhoods all over big cities, as well as at airports and train stations.
This option could make sense over renting from a traditional car rental agency if your driving needs tend to be short term. Car shares can be had for as little as one hour, so they can make more sense for once-in-a-while errands and rides to the airport rather than road trips. A car share may also be easier to secure on short notice than a rental car.
Similar to payment for a car rental, you can pay for a short-term car share with a credit card. So unlike buying or leasing, that means you can take advantage of whatever benefits come along with the use of that credit card, like points or other rewards.
The process of making a vehicle decision, especially a long-term one, can sometimes feel overwhelming – but with a little time spent considering your priorities and lifestyle, you can make that choice with confidence.
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