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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? Or, if you decide to buy a used car, how much more will that save you? And finally, 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 costs 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 2015 Honda Accord EX sedan, which has a True Market Value (TMV®) price of $24,985. That's the average price paid for the car in the area around Edmunds' Santa Monica headquarters.

Here's how we structured the different deals:

Leasing: As of this writing, this Honda Accord EX 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 $339 monthly payment (California tax is included in this figure but not registration fees).

Buying New: To buy this Accord, worth $24,983, we chose a five-year loan with a 20 percent down payment of $4,997. At the currently available 2.99 percent interest rate, the monthly payment is $396.

Buying Used: As a three-year-old car, the 2010 Accord EX has a used TMV dealer retail price of $17,108. We chose a four-year loan with 10 percent down ($1,710) 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 $372.

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 for California):

 

Leasing

Buying New

Buying Used

Total out-of-pocket costs

$24,161

$28,757

$19,566

In terms of out-of-pocket expenses, leasing appears to cost $4,372 less than buying a new car. Buying a used car is $4,818 cheaper than leasing, and a whopping $9,190 cheaper than buying a new car.

Here is something to remember about the apparent lower cost of leasing versus buying new: 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 vehicle that now is 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 nine-year-old car worth about $5,000.

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

 

Leasing

Buying New

Buying Used

Final costs

$24,385

$17,756

$14,566

In this basic comparison, it appears the person who leased the two Accords paid $6,628 more to drive these cars for six years than did the new-car buyer. Buying a used Accord saved the person $9,817 as compared to leasing during this six-year cycle. Furthermore, if both the new-car buyer and the used-car buyer want to keep driving their Accords, they can do so without having a monthly car payment.

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. Meanwhile, the car buyer has to pay for routine maintenance, which is usually just oil changes and tire rotation, as well as paying at least for new tires and brakes, which would cost about $1,000. (Some new cars come with free maintenance programs, but Honda does not offer that perk.) 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 erases some of the maintenance and repair savings. 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.

In short, the person who leases saves money on extra maintenance costs, but pays almost as much as those costs 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, which offers car leasers several advantages.

First of all, leasing protects the consumer from excessive depreciation. 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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Comments

  • rbdeli61 rbdeli61 Posts:

    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.

  • busbodger busbodger Posts:

    $282 IS pretty close to $350...

  • jacobf jacobf Posts:

    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...

  • @rbdeli61 The math says you forgot to mention that you likely paid (or managed to negotiate down) about a $3000 Cap Cost Reduction in your "due at signing" payment. That's what the mat says about your supplied numbers.

  • torres_sa torres_sa Posts:

    A large part of this argument depends on how long you plan to keep your car. I know most of this is based on averages, but if your going try and keep your car for as long as possible then buying new may end up being cheaper than buying used. In theory if you buy a 3 year old used car then it will last 3 years less than a new car. I think the value of those 3 years extra you get from buying new makes the new car the best option if like me you plan to drive the car for as long as possible. I personally try to get 10 years out of mine.

  • reyw reyw Posts:

    In your buying an old car vs. leasing a new car analysis, you left out the positive effect of buying a new car model with improved gas mileage vs. the poorer gas mileage of an older car. That could be a game changer. This is the only point that I see may help some people have better overall view of their purchase vs. lease situations.

  • bruceeden bruceeden Posts:

    My wife and I leased a new 2013 Acura ILX for $350/mo. for 39 months. The lease would have been $306 per month if we didn't take insurance on the tires and wheels (damaged wheel is $1000 to replace). We put $1500 down. At $350/mo. for 39 months, the total would be $13,650 + $1500 =$15,150. At $306/mo., it would be $11,934 + $1500 or $13,434. Buyout option at the end of the lease would be $13,200 (which you could take a loan on and pay off).

  • dwoodmanri dwoodmanri Posts:

    I have been insuring vehicles for individuals and families for the past 12 years. I have yet to see, in RI anyways, someone's premium be higher for a leased vehicle vs an owned vehicle. Most carriers do not even ask the question. Once the owned vehicle loan has been paid off, the consumer has the option to remove expensive physical damage coverage from their vehicle that is required by finance companies. This reduced coverage would only apply in this example for the years after the loan has been paid off. The annual amount would vary greatly depending on the vehicle, driver characteristics, and driving history. $150 per year seems on the low end for comprehensive and collision coverage in RI. I would be interested to know which companies (and in which states) people are charged a higher premium for leasing a vehicle compared to buying it. **Not that it changes anything, but I just realized this article is two years old**

  • philip17 philip17 Posts:

    I recently updated this article with new information and figures. In this example, the TMV (True Market Value) price of the car that was leased was $27,000, not $20,000 as stated in this comment. In this example, there was also $0 on drive off fees which makes the monthly payment higher. The monthly payment was $344 which was offered as a typical example of a typical lease payment. This was done for purposes of comparison to shed some light on the three different scenarios not to try to say that buying is better than leasing. Furthermore, in this article, I offered other non-financial reasons to consider leasing over buying or buying a used car. I wrote this article to reveal costs, not to state my opinion. I hope you will read it that way and learn from the information. Philip Reed, Senior Consumer Advice Editor, Edmunds.com

  • orbe orbe Posts:

    Dart article!! buying a car is the best idea, leasing are for no smart people.

  • commonmann commonmann Posts:

    We bought a used Honda Accord 1998 in 2008, cost us about $7,500. Now, the dealer valued it at about $2,000. So the cost of ownership for 5 years is about $5,500. Given that it will continue to depreciate, then the 6 years cost of ownership is about $6,000. So, where does my story fit into the scenario above? For a 6-year cycle, we could save almost $10,000. That's an extra money the wife can spend on other stuffs.

  • kiltman54 kiltman54 Posts:

    I am in a quandary between buying new, buying old or leasing. The biggest advantage of leasing is getting a high end car (I like to drive) for a lot less money per month. For example: 2014 Cadillac ATS at around $375/month 36 months. The buy out is steep at $25k but what a great car! or I can get a used BMW 328ix for $25k with $10k down for around $200 per month. Buying new isn't an option at around $45-48K for me. It seems obvious that the used BMW is the way to go, but repair costs on these fine cars is huge. Whereas the Cadillac is maintenance free for 36months. After 3 years the BMW is getting pretty old while the Cadillac is still fresh, but do I buy it? that's $25 for a 3 year old car so I am back to where I was with the BMW. I think I am starting to answer my own question (this website is good!!). To perpetually lease the latest car is very attractive to me because of my pleasure factor but in the end there is no equity to show. Just a lot of pleasure. I have lost pretty big on new cars due to depreciation so I won't consider them again.

  • thart2 thart2 Posts:

    I see a couple of issues with this writer's analysis of leasing vs buying. Most importantly the money you don't spend on a car has to go somewhere else. If it goes to entertainment, then the net result does not change. But the way I have always calculated my own financial options for leasing or buying is that I have a total budget to be invested, and if I am buying a car then I am investing in a depreciating asset. But if I am leasing a car, then the money I do not spend, monthly, on the lease goes into my 401k, tax free, and is invested in an appreciating asset (and matched by my employer). This makes a huge difference and at the end of the period of a loan vs lease, the money not invested in the car but invested in the SandP 500 has appreciated dramatically, off-setting the entire cost of leasing a car (using historical rates of return, not selecting for best or worst or most recent periods). This is a key flaw with every lease vs buy analysis I see online. In the real world of family budgets, the money you don't spend on a monthly payment goes somewhere. If it goes to dining out and bars, etc, then there is no net gain and the purchase is better than the lease. But if the savings go to another investment, which to me is the only sensible way to account for the differences, then leasing is far less expensive. I drive an Outback. Current lease rate is 269 before taxes. They are offering an interest free loan to purchase. At 3 years that's 720 per month. At the end of the 3 year period Kelly blue book says the car is worth roughly 19,000. The difference between the 720 purchase payment and 269 lease payment is 451. I put the 451 in my 401k and it's actually 563 before taxes, let it grow at 5-7% per year. At the end of 3 years I'm net ahead. Of course I have to emphasize this only works if you view the 720 payment as money available for investment, and this only works if the difference between the lease and purchase goes directly to your retirement account. What do you think?

  • needacar24 needacar24 Posts:

    Hi, I am trying to get a new car. I am in love with the new chevrolet Impala. it cost more than i have. I am whiling to either lease it or buy it but i do not have any idea on what would be the best choice. I need help please!

  • needacar24 needacar24 Posts:

    Hi, I am trying to get a new car. I am in love with the new chevrolet Impala. it cost more than i have. I am whiling to either lease it or buy it but i do not have any idea on what would be the best choice. it cost, according to www.chevrolet.com, $32,885 and I only have 16.000 I need help please!

  • orbit9090 orbit9090 Posts:

    Convenience factors are not really taken into consideration. A used car may be slightly cheaper than a new car over time, but the extra time and inconvenience that used vehicles may require for unexpected repairs, maintenance, and loss of transportation availability can be a great loss. For less than a couple grand more over time, a person can buy a brand-new car which doesn't have an unknown history and is less likely to need repairs as soon. Well worth it. Leasing only makes sense if you are someone who likes to get a new car every so often. Clearly, leasing is more expensive over time, but to some people who have more disposable income, leasing is worth the extra long-term cost.

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