Depending on where you live and work, having a car may be necessary. But how to finance one, especially if you’re early in your career and saddled with medical school debt, is not easy to figure out.
You’ve probably heard someone say that leasing a car is akin to throwing money away. And you’ve likely read that a car is worth thousands less the second you drive it off the lot. So what’s a physician to do when they need some wheels?
In this article, we explore the differences between buying and leasing a car and examine a couple of realistic scenarios to help you decide which is the better option for you.
Buying vs. Leasing: What’s Better?
For those who need a car, the most financially savvy thing to do is buy a cheap, used car in cash and drive it until the wheels fall off — or maybe just before they fall off. But that’s not practical for many people. You may insist on a highly reliable vehicle so that you have one less thing to worry about when dashing to patient emergencies. If you have small children, you may want a newer car with better safety features and a lower likelihood of breaking down.
As your compensation increases over the course of your career, and as your financial priorities change, so to may your strategy for deciding whether to buy or lease a car. Let’s run through a few scenarios and assess the pros and cons of buying and leasing in each.
Buying vs. Leasing: Key Differences for Physicians to Consider
Buying affords you a wider choice of vehicles, the benefits of ownership, and more flexibility — but at a higher monthly cost. Leasing provides lower monthly costs but no equity and more restrictions. Here’s a breakdown of the differences between leasing and buying a car.
1. Equity
At the end of a lease, you must either return the car to the dealership — and sometimes pay a turn-in fee — or buy the car (either in cash or with a loan) at the price listed in your lease agreement. Regardless of your choice, you do not own the car you’re leasing, which means you can’t sell it or receive trade-in value toward another car.
It’s different when you buy a car. With every payment you make, you’re building your ownership stake in the vehicle. Buying allows you to sell your car, trade it in for another car, or keep driving it.
Don’t take this the wrong way: Cars are not an investment. They depreciate quickly in the first few years of their lives, and there’s little prospect of selling a car for anywhere near what you paid, especially if purchased new. Still, it’s meaningful to have something of value after years of paying your loan.
2. Mileage limits
When you sign a lease, you’ll agree to drive up to a specific number of miles each year, typically between 12,000 and 15,000. If you drive more than the allotted miles, you’ll generally pay between $0.10 and $0.30 per extra mile at the end of your lease term.
Let’s say you have a two-year lease with 15,000 miles per year included, and you turn in the car with 35,000 miles. If the overage fee is $0.25 per mile, you’ll pay $1,250 (15,000 miles ✕ 2 years ✕ $0.25 fee).
3. Maintenance responsibilities
Leasing a car means that you’re driving a new (or new-ish car) that will be covered by its manufacturer’s warranty for most, if not all, of the lease term. Defect-type issues with your powertrain — the engine, transmission, and other expensive-to-repair bits — generally won’t cost you more than a headache.
When you buy a new car, you get to enjoy the same manufacturer’s warranty, but because there is no lease term, you might keep the car long after the warranty expires. Used cars that are more than a few years old generally come with no warranty. If your car breaks down when it’s no longer under warranty, the repair cost will be on you. If you’re low on cash, it can be risky to buy a car that may need costly repairs.
Whether you buy or lease your car, you’re responsible for general upkeep, including changing its oil, tires, and brakes.
Scenario 1: A Resident Needs a Car
Randy Resident earns $60,000 per year as a resident at a university hospital in Missouri. He needs a car to get to work, and he also plans to use it to drive home to Tennessee three times a year. He has $450,000 in student loan debt, but he expects it to go down to $250,000 through public service loan forgiveness. He’s single and mostly lives paycheck to paycheck but has $10,000 in cash for emergencies.
He’d like to buy a new car, but it’s too expensive. Instead, he’s deciding between buying a used car for $5,000 or leasing a new car for $350 per month.
Scenario 2: An Attending Needs a Car
Ashley Attending works at a hospital outside of Boston and earns $350,000 annually. She needs a car to commute to work but plans to use it for family road trips. A married mom of three children under 10 years old, Ashley’s top priority is safety. She’s paid off all her debt except her mortgage and has $50,000 in cash, $350,000 in home equity, and $250,000 in investments.
Ashley is considering financing or leasing a car with a sticker price of $50,000. It’s $944 per month to finance over five years or $705 per month to lease for three years.
Join the Discussion
Have you decided between buying or leasing? Share your experience and tips for others in the comments below.
