Buy It or Turn It In?
Aaron leased a Honda Civic. The lease is up in about nine months. Should he save up the money to purchase the vehicle or save up a couple of thousand for his next vehicle and start paying on his student loan?
QUESTION: Aaron on Facebook leased a Honda Civic. The lease is up in about nine months. Should he save up the money over the next nine months to purchase the vehicle at the end of the lease or save up a couple of thousand for his next vehicle and start paying on his student loan now?
ANSWER: At the end of a lease, the price you get to buy the car at is called the residual value. It’s preset when you lease the car. The question is what’s the car worth? What we’re saying is Honda thought it was going to be worth $12,000 when this lease started. Is the car worth $14,000 and you can buy it for $12,000? That would be a good buy, and you’d want to do that rather than turn it in. Even if you were going to turn around and resell it, you’d want to do that. Is the car worth $9,000 and you have the opportunity to buy it for $12,000? I don’t think so. I think I’ll just turn it in. You would never buy it unless it’s a good buy.
If it’s not a good buy—if it’s not a good price to purchase it at the end of the lease—you would never buy it under any circumstances. I would tell you to never finance it at the end of the lease. If you have to finance it, I would save up, buy a beater, and turn the thing in rather than buying it. If you’re going to turn right around and resell it, maybe you borrow on it because you’re already in debt anyway and turn around and flip it right quick. But we’re not going to borrow on a $12,000 car—just like buying a $12,000 car and going into debt. We’re not going to do that. I’m not going to teach you to borrow money on cars. Don’t do that.
I’m going to look at this like you have a $12,000 car loan, because you do, and we’re changing the format of it from lease to payments if you financed it. Would I keep that car? Only if it’s a small percentage of your income. If your income is $60,000-plus, yeah, I’d probably keep it. If your income is $30,000, no, it’s probably too much. It depends on how much of your income it is. The larger a percentage of your income this is—in other words, the smaller your income is versus the $12,000—the more likely I’m going to dump it. But if you’re making big money—maybe both of you working and making $100,000 or something—this is a fairly cheap car at that point percentage-wise, and I’d probably keep the car.