The Great Car Debate: New, Used or Leased?
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photo: smartvital
It’s the dilemma that every car buyer has grappled with at least once: should I go with a new, used or leased vehicle?
Unforgiving frugalists will tell you that “new vehicles lose 10% of their value the second they are driven off the lot” and consider the case closed. Quality-of-life seekers will argue that the value they receive from owning the car that they’ve always wanted brand new – whether purchased or leased – is priceless.
Wherever you stand on the issue, it’s important to at least crunch the numbers, understand your purchasing style and take a holistic approach to deciding on your next car. Here’s how.
Total Cost of Vehicle Ownership: New Vs. Used. Vs. Leased
Philip Reed, Senior Consumer Advice Editor of automotive website Edmunds.com ran a test looking at the five year total ownership costs of buying a new $20,000 vehicle and driving it 12,000 miles annually versus leasing the same vehicle or buying a used version for $10,000. Reed didn’t clarify how old the $10,000 vehicle would be, but based on common resale value percentages and dealer markup, we estimate that it would be about five years old (which is important later on in our analysis). What he found was intriguing from a financial-geek point of view. The total costs for each scenario ended up being:
- New buy: $32,388
- New lease: $32,140
- Used buy: $18,390
Buy vs. Lease
Clearly, in this example, buying the new car seems to be the least cost-effective, right? Not so fast. With the buy options, you would own the vehicle outright, and your vehicle would have an open market value if you decided to sell it. With the leased option, you own nothing. Clearly, from purely a financial perspective buying a car — whether it’s new or used — definitely makes more sense than leasing. (And that’s even if you stay under your mileage penalty limit on a lease contracts.)
photo: Hugo90
Buying New vs. Used
What’s not as clear, despite the wide price difference and conventional wisdom, is whether buying a new vs. used car makes more financial sense. When you factor in market value in the Edmunds example, the new car’s value after five years was $7,000, while the used car’s value was just $2,000. That would bring your total monetary committment, if you were able to sell both vehicles, down to $25,388 for the new car and $16,390 for the used. Still a big difference, though: $8,998 in favor of the used car.
The Life-of-Vehicle Argument: Where Conventional Car Buying Advice Takes a Turn
Here’s where the Edmunds example leaves you hanging a bit. If you had bought a used car at nearly half the price of the new, drove it five years, and it is now worth just $2,000, the odds are good that it probably doesn’t have much life left in it. It would have been roughly 5 years old based on a 50% resale value (and dealer/seller markup) when you purchased it. On the flip side, the new car might give you a run of another four, five or even seven years, particularly if you are a conservative driver who follows all of the proper maintenance suggestions. Suddenly, the picture is not so clear.
In the first five years of ownership, a used car cost $1,799 less to own than a new one. But here’s where it gets interesting. Let’s assume you get five more years out of the vehicle that you purchased new. If you had bought used and went out and purchased another $10,000 vehicle, you’d be paying $285/mo. for the second used vehicle. Meanwhile, your monthly payments for the new vehicle would be $0. Suddenly, you’re saving $3,420/year with the new car purchase vs. the additional used-car purchase in the second five years.
And Lets Not Forget…
Some people think of their cars as much more than four wheels that get them from point A to point B. There is an emotional connection and joy factor that is hard to put a price tag on. Some also like the peace of mind of knowing exactly what their car has been through — vs wondering how it has been treated by previous owners.
The Bottom Line
Unless you are in a very short-term, high-need situation that turns the numbers in your favor, leasing rarely makes financial sense. (Though if you’re truly the type of person who likes to show off with a shiny new car every two or three years, then leasing might be your best bet. After all, if you try to sell a new or used car just two or three years into a longer-term auto loan, chances are you will be “upside down,” or owe more than the car is worth.)
Choosing between buying new or used is much more complicated. If you plan on driving the car into the ground (that is, keeping it for 10 years or so), it might make a lot of sense to buy new versus used. If you want to swap vehicles more frequently, buying used makes more financial sense. The qualitative and emotional aspects of vehicle ownership may yield a different outcome altogether.
GE Miller writes about personal finance for young professionals at 20somethingfinance.com.
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26 Comments so far
leave a commentThis article doesn’t address a little detail of used car purchases that I think is worth mentioning. When I bought my first car (used, of course), I was fortunate to have enough cash on hand to cover it. It’s much more feasible to buy a used car outright and not have to pay interest on it! And so I take issue with the opening sentence of this article– I never “grappled” with this choice at all.
Very thoughtful look at the buy new/used/lease debate. Most only look at the total operating cost and neglect to look at longevity and quality of life factors that go into a purchase. If you can get twice the life out of a vehicle by riding it from birth to death and get the pick of exactly what you want, why wouldn’t you at least consider buying new?
The article fails to take into account the increased cost of insuring a new car, not to mention the interest that most people end up paying on a new car.
Maybe my case is a little extreme, but I’ve never spent more than $5000 for a car in my life (the average price has been more like $3000, and I’ve always bought used cars with less than 60K miles on them, and always gotten at least 5 years of completely reliable life from them. It takes a little work to find these deals, but they *are* out there.
Eric – the author refers to the ‘total ownership cost’ as highlighted in the Edmunds post, which does, in fact, take insurance costs of new vs. used vehicles into account.
In my country (Malaysia), the price of car is expensive. For example, a Toyota Camry 2.0cc is about the price of a linked house (RM135k).
After crunching the numbers, getting a used car makes more financial sense most of the time. After five years, our cars depreciate to about 50% of the original price. Furthermore, most of us finance 90% of the car purchase with bank loan.
No debate at all – buy used (IN CASH) unless you’re super wealthy.
Otherwise all you’re doing is financing/leasing a depreciating asset. Say that sentence out loud – its just financially ignorant. Listen to Dave Ramsey for 5 minutes and he makes all the necessary arguments.
Agree with Jason… Buy used and pay cash. Forget the rest of it.
I have read that depreciation starts in earnest after 3 years…therefore…it seems best to buy a used vehicle that is about 3 years old…with cash if possible.
The base numbers plus the assumption of resale values actually let us simplify if we imagine owning one new car for 10 years vs 2 used cars, five years each.
New buy: $32,388
Used buy: $18,390 – $2000 (sell this car) +$10,000 (buy a 5 year old equivelant car to the one we would have bought new 5 years earlier) = $26,390
If we can ignore financing, buying used, then trading up after five years to the make and model you would have had if you’d bought new saves us almost exactly $6,000. Over ten year period, the avg. age of our car is 5 years if we buy new, and 7.5 years if we buy used, so that needs to be considered aesthetically.
Look at it this way, buying a new car today (2010) you are buying safety.. things like curtain airbags.. you are probably not going to find them in a 5 year old used car. (specifically a car that 5 years ago only cost $20k) I value the lives of myself and my family at more than $1800 per year, I’d buy new and cut back on other less important expenses in life.
If reliability isn’t an issue, then buying a car for $1000 and only spend money on fuel, fluids and tyres is the cheapest way to own. When it dies, have it carted away for wrecking or scrap metal (which is free around here). Even a cheap car, provided it still passes a roadworthy check, will normally last well over a year.
I like new. Because there is another cost that is difficult to assign a cost to. Older used cars are less dependable. I cannot afford to be late due to car trouble, and when I drive to out-of-the-way places, breakdowns would be a real hassle, and could potentially ruin a vacation.
Steven,
That is probably the ‘dumbess’ thing I have heard. New cars are just as likely to break down as older cars. If an old car is maintained well it should not break down. I drive both a 90′s Geo prism and a 90′s Honda Civic. The only thing I’ve had to replace is timing belts. Many friends have newer cars and they take it to the mechanic multiple times a year. Another factor to consider is build quality. These newer cars are not as reliable as new cars back in the day. Most of them use electronics now that can fail quite easily.
My new cars have been flawless. Honda’s. Bambino, what are your friends buying? Chryslers? No wonder. And what exactly does ‘dumbess’ mean? A female dumb? LOL
The bottom line is with a lease you cannot buy back your car at a reasonable price compared to the money you put into it. That means once you lease, you will always be leasing. So if yo plan on having many vehicles, and you will never exceed the mile limitations and plan on not denting of scratching your car (you pay for the additional body work before it’s turned in)…If that doesn’t bother you than leasing is what is best for you…You will always have a new vehicle to drive ad enjoy.
For those who decide to buy, if you are OK with holding it longer, like fixing up or customizing your car, if you go used, someone else pays the brunt of the depreciation and you sell the car at market price.
I purchased my car (Toyota Camary) in 1999. It is well maintained, looks and runs like new. I haven’t made a payment on it since 2003, but every 120,000 miles expect to pay about $1,000 getting everything I need replaced or upgraded to bring it up to the best standards.
I do it because it saves me money in the long run, my car suits my lifestyle..registration fees are far lower than newer cars. All that saving goes to anything I want or my retirement savings.
If I could afford it, I would buy a used Jaguar (the most reliable car in the world). It provides the best cost benefit in terms of dollars spent vs maintenance fees and reliability. It gives a great ride. People who have that car, will not need to buy one for the rest of their lives and it will always the best ride you can have.
I have many friends who lease. For them it’s easier than have to negotiate prices, deal with maintenance and it’s disposable income where they can always have the latest car. They also spend a lot more for doing that and that doesn’t bother them.
I personally like the money saving and if I every wanted to could scan the universe for my perfect used car and grab it whenever I want. It is always cheaper to fix the car you are drive (accidents aside) than buy a new one. This is particularly true for people who maintain their cars well
This article would make a lot of sense if its assumptions were so blindingly short sighted. It would make financial sense to buy a new car if (as the article implies) cars exploded into pea-sized fragments instantly at the age of 10. Interestingly enough however, they don’t! That’s right folks, now you too can own a car which is 11,12, even 13 years old! Dare I say 15? I do dare, because a reasonable lifespan for a car is more like 20 years than 10. My cars are 23 and 19 respectively and they still work just fine, thanks.
Jason, I’m sure you’re a nice young man but I don’t know where you get your information from. Maybe because you desire a Jaguar that you think it’s the most reliable car out there. You could not be more wrong.I have many friends who have had them and have hated them. Everything goes wrong and they’re in the shop all the time. They get rid of them asap. Because I was in a head-on collision a few years ago, I will only drive a car that’s good to crash in. I have had 4 BMW’s and am now on my 2nd Mercedes and have NEVER had a thing go wrong with either of them. They are the best cars to crash in, have air bags and other safety features all over the place. You will not ever get that paying $3000 for a car. I hope you never crash because you won’t make it. Oh, and I have been leasing my cars for about 18 years now and I will never go back to purchasing them. #1, the lease payments are much less than financing payments. #2, there are new safety features and bells and whistles coming out all the time and I would much rather lease for 2 years and get a new car with the new safety thingss than be stuck paying for a new car that becomes used a few years into the payment plan. Waste of money to me.
It’s buyers like you who make it possible for used car buyers to drive nice cars for cheap. Thanks. This world takes all kinds.
what is this BS about the car only lasting about 10 years? Buy a Honda or a Toyota, my last car was an 86 Civic. Not the most comfortable or stylish car, but at over 250k miles it was still running like a champ. Would have topped 300k if I hadn’t been hit by another car. My “new” car is a 98 Civic. Already 12 years old and I fully expect it to last at least another 12 years. I only paid $3500 for it (cash of course) and my yearly costs don’t run much about gas, oil changes and insurance.
God, I love articles like this. Let’s spell out what’s common sense to any idiot – used cars are cheaper but run a risk of having more problems – and then write an entire article that does nothing to answer the question of whether to buy new or used.
FWIW I just bought a brand new Dodge Charger. I got a great price and I know for at least the next 3 years anything that goes wrong is covered under the warranty. Peace of mind is worth it…
I’m pretty sure that picture is from the Lamborghini museum in Italy. Awesome!
You also need to factor in insurance costs. Insuring a used vehicle is less expensive than a new vehicle. Especially if you can self insure for a collision and just purchase liability insurance on the used vehicle.
Also, consider owning the used car for more than 5 years. I purchased a 97 Acura CL with 50k miles in 2000. Ten years later with 160k miles it still runs like a champ with no intention of selling soon.
Total cost of ownership for this car is FAR under your estimates.
But, us used car buyers are very thankful for those who need new cars and are willing to pay for them. We benefit.
Interesting stuff. I was never in favor of buying used cars but this article really made me think about factors that I never considered before. Now I think, I can at least consider it for once. And who knows? If I find the right deal, I might as well go for a used car now.
In the long run, I think the reliability of the car is as important as whether you go new or used. My wife and I went new because at the time, they only offered 0% financing (36 months) on new vehicles. We did our research and went to a friend, a straight-shooter, who we negotiated with based on the final price of the vehicle NOT the monthly payment.
New, used, or leased you’re going to wind up FLEECED if you don’t do your homework beforehand. If you’re not confident in your negotiating skills, stay away from dealerships. Consumer Reports has great resources when it comes to negotiating with the dealer when buying a car.
There were lots of numbers to crunch here! Thanks for breaking this down because i’m currently face with the decision of buying new vs.used.
Interesting stuff. I love articles like this and Boris, definitely correct that can be found Lamborghini museum in Italy. Indeed Awesome!