Brooklyn, New York lies right at the crossroads of one of America’s most beautiful regions.
Unfortunately, New York, despite it’s thousands of miles of breathtaking highway, is one of the most expensive places in the United States to own and drive a car. The sales tax and state fees alone are enough to make even a Silicon Valley millionaire balk at buying personal transportation. And the ongoing emissions regulations, other environmental-based fees and taxes make owning anything but the latest and most technologically advanced vehicle a roll of the dice.
Why leasing in New York can make a lot more sense than buying
In New York, if your car doesn’t pass inspection, it’s value in the state will plummet to next to nothing. Bringing non-compliant cars up to speed is often more expensive than the car’s current resale value, rendering the vehicle little more than scrap. The obvious away around this risk of owning a car that suddenly becomes worthless is to buy only new or very slightly used. But then you run into the enormous state fees and taxes. This conundrum can make driving in New York almost totally unaffordable to anyone but the rich.
One solution to the problem is to lease, instead of buying. Leasing completely eliminates the specter of paying between $2,000 and $5,000 in immediate taxes and fees. While the ongoing monthly payments on a lease are taxed, this only amounts to the tiniest fraction of the lump-sum sales tax payment that a buyer would be forced to incur, were he to buy the car brand new.
Leasing also eliminates the prospect of a non-compliant inspection. Most lease agreements stipulate that the lessor will cover all costs of repair or extraordinary maintenance. This is essentially akin to a warranty, with most risk of ownership being completely lifted from the person leasing the vehicle. On top of this, leased vehicles are almost always brand new or very nearly brand new. The chances of such vehicles not passing inspection is minimal.
But the money saved by not paying the exorbitant state taxes and fees in New York is not even the largest source of savings with leasing. When a consumer buys a new vehicle on a bank loan, they are usually required to make a sizable down payment. Depending on credit and the terms of the loan, this amount can be anywhere from a few hundred dollars to tens of thousands, with most down payments falling in the multi-thousand-dollar range. This is a tremendous cash outlay for most Americans, making many of them unable to afford the costs of buying a new car. These people will often end up assuming the considerable risks that come from buying a high-mileage used car as result of not being able to come up with the large up-front payments of a brand new one.
All of this ties into an important theme in economics, which may sound abstract at first but has some of the most tangible real-world consequences of any economic theory. That is the time value of money. Simply put, $100 today has much more value than $100 five years from now. In the abstract, this is because that $100 today can be invested, earning a positive rate of return, thus being worth more than $100 in five years.
However, in the real world, that $100 goes towards things like paying the cable bill, buying food and taking care of kids’ medical expenses. In fact, car payments are one of the main contributing factors to bankruptcies in the U.S. today. Most or all of the people in bankruptcy court who can’t afford their car payments were able to come up with thousands of dollars for the down payment on their loan. If they would have leased, they wouldn’t have ever run into trouble.
This brings up yet another benefit of leasing. Everyone runs into financial rough patches. When you’re leasing your car, if you can’t continue making payments, you can simply turn the car in. There may be a nominal fee for early termination. But that will be the end of it. On the other hand, if you own a car that you borrowed from a bank to buy and you can’t meet your monthly payments, you may be in serious trouble.
The rapid depreciation of cars, combined with the volatile resale markets, mean it’s easy to end up owing more than the car’s worth. In a repo situation, this can leave car owners without transportation, paying tens of thousands on a car they no longer own or drive.