Compare the Costs: Buying vs. Leasing vs. Buying a Used Car



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 $608.00 per month $7,296
Insurance $1,140.00
Maintenance & repairs $100.00
DMV Fees (included in monthly payments for first year) $300.00
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 $608.00 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 $350.00 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.