Buying Tips
Compare the Costs: Buying vs. Leasing vs. Buying a Used Car
By Philip Reed, Senior Consumer Advice Editor Email
Video highlights of this article
People say you shouldn't discuss religion or politics. But there is another touchy
subject that leads to heated debates: Should you lease or buy a car? A closely
related question is this: Should you lease or buy a new or used car?
There are two ways to answer this sticky lease versus buy
question: financially and emotionally. Some people look at the numbers and take
the cheaper option. Other people are willing to pay more for something that better
suits their lifestyle. When it comes right down to it, some people feel that driving
a new car is important, and they're willing to shoulder the extra expense to do
so.
Clearly, owning and operating a vehicle can be expensive. But there are ways to
save money lots of money. In fact, when you look at the average household
budget, the biggest opportunity for savings is found in auto-related costs rather
than food, clothing or utility bills. For example, everyone knows the monthly
payments are higher to buy or lease a new car. But many people overlook the fact
that new cars also mean higher insurance and DMV fees. Over time these extra expenses
add up.
There are arguments to be made for buying a car outright, taking out a loan or
leasing. If you want more information on the pros and cons of leasing versus buying,
see our 10 Steps to Leasing a New Car. For the pros and cons of buying new versus used vehicles see 10 Steps to Buying a Used Car.
In this article, we are going to focus on the economics of the three different
scenarios. To get information for specific makes and models of cars, use Edmunds.com's True Cost to Own which projects buying and related costs over a five year period.
We'll look at start-up costs for the initial purchase (or lease) and
how the costs change over the subsequent five years.
Later in this article, we'll look at what
you have left after five years of leasing or buying. What you'll see is that the
full economic picture isn't revealed until you look at a five-year span of car-related
expenses. This timeframe was chosen because the five-year mark is when people
typically change cars.
The Three Common Car Ownership Experiences
The three scenarios we'll be looking at in this article are as follows:
- A new car purchase
- A leased car
- A used car purchase
In some cases we needed to estimate and project figures to complete the comparison.
Sales tax and DMV fees were based on Southern California rates, where Edmunds.com
is located. Expenses for people living in other sections of the country will probably
be lower.
New Car Purchase
Owning a new car has traditionally been the preferred choice of the American public.
However, the cost of new cars has risen faster than the earning power of most
people. As the cost of new cars has risen, the length of loans has increased.
Cars were once financed for two or three years, meaning that when the car was
fairly new it was completely paid off. Now, however, new car loans are stretched
as long as five or six years (60 and 72 months) to keep the monthly payments lower.
In our example, we've chosen a three-year loan so we can more easily compare it
to a three-year lease contract. Furthermore, the best interest rates are offered
on shorter loans; a six-year loan would probably carry a higher interest rate.
For the purposes of these examples, we assumed that the owner would drive 12,000
miles a year. Here is how the expenses stacked up for the first year of ownership
of a $20,000 new car.
New
Car Ownership First Year ( 3-year loan @ 6%) |
|
|
|
Down
Payment |
|
$3,000 |
Monthly
payment |
$608
per month |
$7,296 |
Insurance |
|
$1,140 |
Maintenance
& repairs |
$100 |
DMV
Fees (included in monthly payments for first year) |
$300 |
TOTAL |
$11,536
|
In the above example, the buyer made a down payment of $3,000 to reduce the monthly
payments. This required a large lump sum of money to drive away in the car. Clearly,
during the first year of ownership, the costs were very high.
What happens over the five years the owner drives this car? For three years, the
payments are high. However, there isn't the big hit of the $3,000 down payment
each year. Then, once the loan is paid off, the car is still fairly new and expenses
are lower. By the end of the five years, here's how the totals look:
New
Car Ownership Five Year Total ( 3 year loan @ 6%) |
|
|
|
Down
Payment |
|
$3,000 |
Monthly
payment |
$608
per month |
$21,888 |
Insurance |
|
$5,700 |
Maintenance
& repairs |
$1,100 |
DMV
Fees ($300 included in monthly payments for first year) |
$1,000 |
TOTAL |
$32,388
|
As you can see, quite a lot of money went toward interest $18,900 was financed
(sales tax and DMV fees were $1,900) and yet the total amount of the 36 car payments
was $21,888. This means a total of $2,988 was spent on interest. A significant
amount of money was spent on insurance. Yearly DMV fees started high but leveled
off over time and only added up to $1,000 for the five years.
When viewing car expenses, it's important to consider them in light of how long
you usually keep a vehicle. In the above example, the car belonged to the owner
after three years. If he wants to continue driving the car, he can do so, and
without a monthly payment (assuming it is still in good operating condition).
His only expenses will be for insurance, gas, maintenance and repairs, and DMV
fees.
Vehicle Leasing Expenses
As the cost of new vehicles has risen, the popularity of leasing has also increased.
Leasing presents several advantages that can be appreciated now that we've looked
at the ownership scenario. Here are the main economic benefits to leasing:
- Low or no down payment
- Lower monthly payments
- Lower sales tax (tax is only paid on the amount of the car's value used
over three years this is half the amount of the car's total value)
The three points listed above are beneficial because it means you can get a car
without a big shock to your budget. You pay little money out of pocket, and you
make smaller monthly payments. Keep these points in mind as you look at the numbers.
Again, we chose a $20,000 vehicle and examined the cost of a three-year lease,
assuming it would be driven 12,000 miles a year.
New
Car Lease First Year ( 3 year lease @ 6%) |
|
|
|
Down
Payment |
|
$1,000 |
Monthly
payment |
$350 per month |
$4,200 |
Insurance |
|
$1,380 |
Maintenance
& repairs |
$100 |
DMV
Fees (included in monthly payments for first year) |
$300 |
TOTAL |
$6,680
|
You will quickly notice that the out-of-pocket expenses of leasing a car, $6,680,
is less than the $11,536 spent on a new car during the first year, despite the
fact that insurance on a lease car is usually higher. In the second year of leasing
the costs drop, but not dramatically (the reduction is due to the absence of the
$1,000 drive-off fees and lower DMV fees). However, in our five-year scenario,
a second three-year lease must be initiated. This would require paying drive-off
fees again, which would be at least $1,000. Also, since it is three years later,
the lease payment will probably be higher, too. So, for the remaining 24 months
of the five-year cycle, we have increased the monthly payments to $385. Additionally,
when the second lease begins, the DMV fees rise for the first year.
New Car Lease Five Year Total
(Two 3-year leases @ 6%) |
|
|
|
Down
Payment |
|
$2,000 |
Monthly
payment |
$350 /month
for 36 months |
$21,840 |
|
$385 /month
for 24 months |
|
Insurance |
|
$6,900 |
Maintenance
& repairs |
$800 |
DMV
Fees (included in monthly payments for first year) |
$1,230 |
TOTAL |
$32,140
|
Looking at the figures above, you'll see that maintenance costs are only $800.
This is because, in the first three years of a car's life, we're assuming that
only a brake job and oil changes are required (everything else is covered by the
warranty). Even tires usually don't wear out on a car that is leased for three
years.
Used Car Ownership
After the shock of seeing the cost of new car ownership and the expense of leasing,
it's time for some good news. In this example, we assumed that a person bought
a used car for $10,000 by making a $2,000 down payment and paying off the balance
over three years at an 8 percent interest rate (used car loans are financed at
higher rates).
Used
Car Ownership First Year (3-year loan @ 8%) |
|
|
|
Down
Payment |
|
$2,000 |
Monthly
payment |
$285 per
month |
$3,420 |
Insurance |
|
$850 |
Maintenance
& repairs |
$300 |
DMV
Fees (included in monthly payments for first year) |
$200 |
TOTAL |
$6,570
|
As you can see, the first year expenses are not exceptionally low. But at the
end of three years the picture improves the car is paid off and expenses
remain almost level. We increased the maintenance and repairs cost for each ensuing
year. However, the cost of insurance can be lower than when buying or leasing
a new car, particularly if you opt to waive theft and collision coverage and go
with just liability (once the loan is paid off).
The real savings of owning a used car comes from all the years of potential service
it provides after it's paid off up until "the wheels fall off." Over five years
the totals look like this:
Used
Car Ownership Five Year Total (3-year loan @ 8%) |
|
|
|
Down
Payment |
|
$2,000 |
Monthly
payment |
$285 per
month |
$10,260 |
Insurance
(rates drop after first three years) |
$3,430 |
Maintenance
& repairs |
$2,700 |
DMV
Fees ($200 included in monthly payments for first year) |
$650 |
TOTAL |
$18,390
|
Comparing Ownership Scenarios
So far, the used car scenario looks best at $18,390 for five years. Leasing comes
in second with a five-year total of $32,140. New car buying appears to
be the most expensive at $32,388. However, the two people who bought their cars
now own them and can benefit from the value in the cars. They will benefit either
by continuing to drive the cars and getting practical value from their purchase,
or they might decide to sell their cars.
We've estimated that the person who bought a new car will have a car worth $7,000
after five years. The person who bought a used car for $10,000 will have a car
worth $2,000. The person who is leasing has no equity, and in another year, will
have no car. If the value of the cars are figured back into the new and used-car
buying formula, a different result is revealed.
|
New
Car Ownership
|
Used
Car Ownership
|
Lease
Car
|
|
Adjusted
Total
|
Adjusted
Total
|
Adjusted
Total
|
Cash out-of-pocket |
$32,388
|
$18,390
|
$32,140
|
|
|
|
|
Value of the car now
owned |
$7,000
|
$2,000
|
$0
|
|
|
|
|
Adjusted cash out-of-pocket |
$25,388
|
$16,390
|
$32,140
|
Conclusions
Now we see that leasing becomes the most expensive way to drive in the
long run. Here's how leasing compares to the two ownership scenarios:
Leasing vs. Buying New Using the figures presented in this article,
it is $6,752 more to lease a new car over a five-year period, than it is to buy
the same car outright. This breaks down to $1,350 more per year to lease rather
than to buy a new car.
Leasing vs. Buying Used It is $15,750 more to lease a new car over
a five-year period than it is to buy and operate a used car for the same amount
of time. This is an additional yearly cost of $3,150.
Buying Used vs. Buying New Not surprisingly, it costs a lot less
to buy and drive a used car over a five-year period than a new car. In this example,
it is $8,998 less for five years or $1,799 less per year.
The figures we've presented here indicate that buying a car whether it
is new or used is more economical than leasing a car. However, some people
might point out that, while driving a used car costs less, the pleasure of driving
an older car is lower, too. To be fair, you can't put a dollar value on the fun
of driving a new car. As we said before, the benefits of new/leased/used vehicles
can be argued many different ways. The purpose of this article was to look at
the numbers involved in typical examples and let the figures speak for themselves.
|