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Comparing Car Costs: Buy New, Buy Used or Lease?


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Comparing Car Costs: Buy New, Buy Used or Lease?

How does the cost of leasing compare to buying the same new car in terms of out-of-pocket costs? And, if you decide to buy a used car, how much more will that save you? Furthermore, what do those costs look like in the long run?

These are important questions for consumers who want to limit their automotive expenses over the years. It's hard to give one definitive answer that covers all people and all situations. But here we will divide this issue into two parts:

1. An analysis of the cold, hard cost of three different ways to buy a car: leasing, buying new and buying used.
2. A discussion of non-monetary issues that might affect your decision.

One Car, Three Financing Methods
In this analysis we look at an average car ownership period, which Polk estimates now is almost six years. As an example, we chose the 2013 Honda Accord EX, which has a True Market Value (TMV®) price of $24,500.

Here's how we structured the different deals:

Leasing: At the time of this writing, this Accord currently has a lease special listed on our incentives and rebates page. The lease runs for three years, requires no drive-off fees and carries a $344 monthly payment.

Buying New: To buy this Accord, worth $24,500, we chose a five-year loan with a 20 percent down payment of $5,430. At the currently available 3 percent interest rate, the monthly payment is $390.

Buying Used: A 3-year-old car, the 2010 Accord EX, has a used TMV price of $17,761. We chose a four-year loan with 10 percent down ($1,776) and financed the purchase at 3.5 percent for four years. (Interest rates on used-car loans are slightly higher than new-car loan rates.) The monthly payment is $400.

Keep in mind that with our six-year ownership scenario, we would need two lease cycles of three years each. For the new car, it would be one five-year loan, plus one additional year of ownership with no car payments at all. For the used car, it is a four-year loan and two years without car payments.

After six years, here are the total out-of-pocket costs of each approach (including tax and registration fees for California):

  Leasing Buying New Buying Used
Total out-of-pocket costs $24,768 $28,830 $20,960

In terms of out-of-pocket expenses, leasing appears to cost $4,062 less than buying a new car. Buying a used car is $3,793 cheaper than leasing, and a whopping $7,854 cheaper than buying a new car.

But remember that at the end of two leasing cycles, the person who leased doesn't own the car. He or she has to start a new lease-or-buy cycle. Meanwhile, the person who bought a new car would own a depreciated vehicle worth about $11,000, according to the depreciation listed in Edmunds' True Cost to Own (TCO®) calculator. The person who bought the used car now owns a 9-year-old car worth about $5,000.

When we factor equity into the equation, the cost picture changes:

  Leasing Buying New Buying Used
Total out-of-pocket costs $24,768 $17,830 $15,976

In this basic comparison, it appears the person who leased the Accord paid $6,938 more to drive it for six years than did the new-car buyer. Buying a used Accord saved only an additional $1,854 during this six-year cycle.

Related Expenses
We should point out that the person who leased has escaped the repair and maintenance costs that car owners typically encounter with aging cars. On top of routine maintenance, which is usually just oil changes and tire rotation, the new-car buyer will at least have to pay for new tires and brakes, which would cost at least $1,000. The used-car buyer will have to pay for these items and probably some additional repairs, too.

However, the higher cost of insurance for a leased car offsets the maintenance and repair costs for the person who bought the car. Insurance for a leased car, such as the Accord EX, would be at least $150 extra each year, adding up to $900 for a six-year cycle.

So the person who leases and saves money on extra maintenance costs pays almost as much in extra insurance premiums. It's close to being a wash.

Leasing's Other Advantages
While it is true that the people who lease have no car at the end of the lease, they do have the opportunity to purchase the car at a preset price. The finance company sets the purchase price for the leased car at the beginning of the lease. This offers several advantages.

First of all, leasing protects the consumer from excessive depreciation. So if the market value of the car drops due to unforeseen circumstances, such as rising gas prices, this drop in value doesn't hit the consumer. Conversely, if the lease car holds its value especially well, the consumer can buy the car at a bargain price, and either keep or resell it. In some cases, consumers can leverage equity that they've built up in a leased car.

One other big advantage to leasing is that it offers an attractive tax deduction for someone using the car for business. An accountant is the best resource for more information on this subject.

The Appeal of Ownership
It's hard to put a price tag on the value of ownership. The person who buys a car owns it and can experience the pride that goes with it. Beyond just the abstract enjoyment of possessing a nice car, ownership does offer several other advantages.

You can modify the car exactly as you want without fears that you will break the terms of your lease. Excess wear and tear is not a concern for the car buyer. Also, owning the car gives you more flexibility to sell the car when you want, not when the lease is up.

Finally, there are some other important elements to consider as you decide. These are harder to monetize:

  • Leasing provides the enjoyment and prestige of driving a newer car more often.
  • Leasing puts you in a new car that has the latest safety, technology and comfort features.
  • Leasing in three-year cycles means you are always under the manufacturer's bumper-to-bumper warranty.
  • Owning a car allows unlimited driving with no mileage penalty. Leasing limits a person to only 10,000-12,000 miles per year. After that, each mile typically costs 15 cents.

While there are many factors to consider when making the lease-or-buy decision, the best place to start is with the numbers. Do your own calculations, factor in the intangibles and the best decision will emerge.

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Most Recommended Comments

By rbdeli61
on 08/02/11
8:38 PM PST

I've been leasing cars for 22 years and not once have paid anything close to $350.00 a month on a $20,000 car. My current lease is for a Toyota RAV4 V6 with a few options that brought the price up to $27,000 MSRP. My payment is $282.00 a month and that's with a $500 cash back rebate. Do the math. There is no such thing as a 3 year, 4 year or 5 year loan that will save money over a good lease when you consider the real numbers.

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By jacobf
on 03/13/12
6:51 AM PST

Time value of money is also not clearly taken into consideration. If you lease, you are saving on monthly payments out to at least 3 years. Those savings can be either invested or spent otherwise immediately, where as with buying you may save over the "long run", but money later is worth less than money now...

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