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