Compare the Costs: Buying vs.
Leasing vs. Buying a Used Car
Published: 09/14/2001 Updated: 04/13/2012 - by Philip Reed, Senior Consumer Advice Editor

2012 Toyota Camry A new car purchase is the most expensive in the first year.
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: If you do buy instead of lease,
should you buy a new car or a used one?
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 autorelated 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, for taking out a
loan or for 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 doesn't
become clear until you look at a five-year span of car-related expenses. We
chose this timeframe 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 car lease

A used car purchase
We based sales tax and DMV fees on a transaction in Southern California,
where Edmunds.com is located. Expenses for people living in other sections
of the country will probably be lower.
New Car Purchase
The American public has traditionally preferred to own a new car. However,
the cost of new cars has risen faster than has the earning power of most
people. As the cost of new cars has risen, the length of loans has increased.
People once financed cars for two or three years, meaning that the car was
fairly new when it was completely paid off. Now, however, new car loans
stretch to five or six years (60 or 72 months) to keep the monthly payments
lower. In our example, we've chosen a five-year loan because it is the most
common loan in use today.
For the purposes of these examples, we assumed that the owner would drive
15,000 miles a year. We assumed 12,000 miles for the leased car. We also
used the average purchase price, down payment, and interest rate of a new
and used car. Here is how the expenses stacked up for the first year of
ownership of a $29,500 new car.
These figures are meant to highlight the general costs of buying, selling or
leasing a vehicle. They can be either more or less expensive based on where
you live and what car you choose.
New Car Ownership — First Year ( 5-year loan @ 4.4%)
Down Payment
Monthly payment
$3,260
$544 per month
$5,984
Insurance
$1,798
Maintenance & repairs
$61
Taxes and DMV Fees
$2,482
TOTAL
$13,585
In the example above, the buyer made an 11 percent down payment of
$3,260 to reduce the monthly payments. During the first year of ownership,
the costs were very high when compared to the other options.
Here's what happens over the five years the owner drives this car. For five
years, the payments are high. However, the big hit of the $3,260 down
payment is gone. 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 ( 5 year loan @ 4.4%)
Down Payment
Monthly payment
$3,260
$544 per month
$32,096
Insurance
$9,641
Maintenance & repairs
$4,288
Taxes and DMV Fees
$3,076
TOTAL
$52,361
The buyer financed $29,264, including sales tax and DMV fees of $3,024.
And yet the total amount of the 60 car payments was $32,096. This means
he spent a total of $3,390 on interest. He also spent a significant amount of
money on insurance. Yearly DMV registration fees started high but leveled
off over time.
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 five years. If he wants to continue driving the car once the
loan is paid off, 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 minor repairs and DMV fees.
Vehicle Leasing Expenses
As the cost of new vehicles rises, so does the popularity of leasing. Leasing
presents several advantages you can see now that we've looked at the costs
of ownership. Here are the main economic benefits to leasing:

Low — or no — down payment

Lower monthly payments

Lower sales tax. You pay the tax only on the amount of the car's used
value. Over three years, this is half the amount of the car's total value.
These three points are beneficial because it means you can get a car without
a big shock to your budget. You pay a little money out of pocket, and you
make smaller monthly payments. Keep these points in mind as you look at
the numbers below. Again, we chose the average price of a leased car in
2011 ($32,680) and examined the cost of a three-year lease, assuming the
terms would include 12,000 miles a year.
New Car Lease — First Year ( 3 year lease @ 2.85%)
Down Payment
Monthly payment
$1,364
$433 per month
$4,763
Insurance
$2,581
Maintenance & repairs
$194
Taxes and DMV Fees
$1,357
TOTAL
$8,895
The out-of-pocket expenses of leasing a car, $8,895, are less than the
$13,585 a buyer would spend 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. It's less because there are no
$1,364 drive-off fees, and the DMV fees are lower. But because we're
looking at a five-year span of ownership, the buyer would have to go into a
second three-year lease. This would require paying drive-off fees again,
which would be at least $1,000. Also, since three years would have elapsed,
the lease payments will probably be higher, too. So for the remaining 24
months of the five-year cycle, we have increased the monthly payments to
$476. Of course, when the second lease begins, the higher first-year DMV
fees are back.
New Car Lease — Five Year Total (Two 3-year leases @ 2.85%)
Down Payment (Two $1,364 down payments)
Monthly payment
$2,728
$433 /month for 36 months
$15,155
$476 /month for 24 months
$10,948
Insurance
$13,629
Maintenance & repairs
$2,068
Taxes and DMV Fees
$4,310
TOTAL
$48,838
Looking at the figures above, you'll see that maintenance costs are less than
when you buy the car. In the first three years of a car's life, we're assuming
that only a brake job and oil changes would be required. Everything else
would be covered by the car's warranty. Even tires usually don't wear out on
a car that is leased for three years. If you lease a car with a free
maintenance program, these costs fall dramatically.
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 used the average
price of a financed three-year-old used car in 2011 ($18,500). We assumed
that a person made a $2,105 down payment and paid off the balance over
five years at an 8.3 percent interest rate. Used-car loans have higher
interest rates than do new-car loans.
Used Car Ownership — First Year (5-year loan @ 8.3%)
Down Payment
Monthly payment
$2,105
$374 per month
$4,114
Insurance
$1,998
Maintenance & repairs
$1,099
Taxes and DMV Fees
$1,642
TOTAL
$10,958
As you can see, the first-year expenses are not exceptionally low. But at the
end of five 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 for used cars
than for new or leased cars, particularly if you opt to waive theft and
collision coverage and go with just liability coverage, once you have paid off
the loan.
The real savings of owning a used car comes from all the years of potential
service it provides after it's paid off and up until "the wheels fall off." Over
five years the totals look like this:
Used Car Ownership — Five Year Total (5-year loan @ 8.4%)
Down Payment
Monthly payment
$2,105
$374 per month
$22,066
Insurance
$10,714
Maintenance & repairs
$6,687
Taxes and DMV Fees
$2,120
TOTAL
$43,692
Comparing Ownership Scenarios
So far, the used car scenario looks best: $43,692 over five years. Leasing
comes in second with a five-year total of $48,838. New car buying appears
to be the most expensive at $52,361. However, the two people who bought
their cars now own them and can benefit from the equity they have in the
cars. They will benefit either by continuing to drive the cars and getting
practical value from their purchase, or from selling their cars.
We've estimated that a car bought new will be worth $14,160 five years
later. This represents 52 percent depreciation. The person who bought a
used car for $18,500 will have a slower rate of depreciation: 42 percent. His
car will be worth about $10,962. The person who is leasing has no equity in
the car, and in another year, will have no car. If you figure the equity an
owner has in the back into the new and used-car buying formula, you see a
much different picture:
New Car Ownership
Used Car Ownership
Lease Car
Adjusted Total
Adjusted Total
Adjusted Total
Cash out-of-pocket
$52,361
$43,692
$48,838
Value of the car now owned
$14,160
$10,730
$0
Adjusted cash out-of-pocket
$38,201
$32,962
$48,838
Conclusions
It's clear that in the long run, leasing is the most expensive way to drive.
Here's how leasing compares to the two ownership scenarios:
Leasing vs. Buying New: Using the figures presented in this article, it
costs $10,637 more to lease a new car over a five-year period than to buy
the car outright. This breaks down to $2,127 more per year to lease rather
than buy a new car.
Leasing vs. Buying Used: It cost $15,876 more to lease a new car over a
five-year period than to buy and operate a used car for the same amount of
time. This is an additional yearly cost of $3,175.
Buying Used vs. Buying New: It costs a lot less to buy and drive a used
car over a five-year period than it does a new car. In this example, it is
$5,239 less for five years or $1,048 less per year.
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, it's less pleasurable to drive an older car. To be fair, you can't put
a dollar value on the fun of driving a new car. As we said before, you can
argue the benefits of new/leased/used vehicles many different ways. But if
dollars are uppermost in your mind, the figures speak for themselves.
http://www.edmunds.com/car-buying/compare-the-costs-buying-vs-leasing-vs-buying-a-used-car.html