When in the market for a car or truck many consumers compare the benefits of leasing a car vs buying a new car. There is a third choice that often is neglected -- buying a lightly used car. If you can afford it, the general consensus among financial gurus is that buying a vehicle is a better option than leasing if you are planning on keeping the vehicle for the medium to long term, (5+ years). To take it a step further, buying a lightly used vehicle is a better option than buying a new vehicle as new cars or trucks lose on average 20% of their value in the first year of ownership, but only 10% each of the next two years. Let's examine each scenario in greater detail by comparing the advantages and disadvantages of each.
Buying a new car or truck has historically been the preferred choice for Americans. But as the cost of new vehicles have risen, vehicles now last longer than they ever have, access to used vehicle inventory has increased and the information available on used cars has improved thanks to CARFAX, Carchex, and auto research sites like Edmunds there has been a shift in what consumers are willing to buy from new cars to used cars. Used cars now outsell new cars at a 3 to 1 rate. Yet, American's love affair with the new car persists. Let's examine the advantages to buying a new car or truck in detail.
* The interest rate you receive for a new car loan will be lower than it would if you purchased a used vehicle.
* A warranty will cover all major repairs for the first 3+ years of ownership, keeping repair costs down.
* The vehicle has no hidden history to uncover.
* That intangible benefit of the new car smell, look, and feel.
If you are considering purchasing a new car or truck, in addition to paying more for the vehicle there are other negatives to consider:
* New vehicles are in general more expensive to insure.
* New vehicles cost significantly more than a 2 or 3 year old used car, and depreciate in value much faster.
* Unknown safety and reliability history. You will have a basic idea of a new car's reliability because of data on prior model years, but there is still a chance that a new issue will arise.
If cost is a huge factor, and that new car smell is not a requirement, buying a used car or truck is a great option. Here are the advantages to buying a used vehicle:
* The vehicle has already gone through its greatest depreciation as cars and trucks lose the most value in the first year of ownership.
* In general you do not have to pay sales tax. Consult your state's DMV to confirm as each state has different requirements.
* The purchase price will be lower than that of a comparable new car.
* When new vehicles come on the market it is difficult to determine their long-term reliability, but after a vehicle has been on the market for a couple years, repair and maintenance history for that model will be easier to determine.
Of course, there are disadvantages that come with purchasing a used vehicle. Although you can expect to pay less for a used vehicle the disadvantages to purchasing a used car or truck center around one thing -- the costs associated with the age of the vehicle.
* If you finance the purchase, your interest rate will be higher than it would be if you purchased a new car. You can expect to see interest rates that are 2% higher.
* The warranty will expire faster. If you purchase a 2 year old vehicle with a 4 year original warranty, the vehicle will be coming off warranty in 2 years. You might want to consider an extended warranty, otherwise known as extended service protection.
* Maintenance and repair costs will be higher. This goes hand in hand with the expiration of the warranty, but there will also be more wear and tear that will not be covered by the warranty before it expires.
* There is a fear of the unknown. A vehicle history report and a professional vehicle inspection will help protect you against making a huge financial mistake, but a new or leased vehicle will not have the potential of having a hidden history.
* In general, a used vehicle will not last as long as a new vehicle.
Now that we have examined purchasing a vehicle, let's consider the benefits and costs of leasing a vehicle. When you are leasing a car, what you are doing is renting it from the leasing company for a certain period of time. When you lease a vehicle you are paying only for the depreciation of the vehicle, plus finance charges, taxes, and fees. So if you are leasing a vehicle that costs $25,000, and it loses $12,000 in value over 3 years your monthly payments will only encompass the $12,000 depreciation and the aforementioned finance charges, taxes, and fees. If you decide to buy the vehicle at the end of the lease your purchase price is the residual value. This value is generally much higher than the actual value of the vehicle. The benefits of leasing a vehicle all center around ease and convenience.
* Monthly lease payments are much lower than new car loan payments (but in line with used car payments).
* The leasing option down payment is usually low -- generally you just need to come up with money for the first month's payment, a security deposit, and fees.
* Leases are easier to obtain than car loans.
* Because leases are usually 3 or 4 years and most warranties on new cars last 3+ years, maintenance costs are low.
With the advantages of leasing there also come disadvantages. These disadvantages center around returning the vehicle when the lease term expires. Let's examine them in detail:
* There is a limit to the number of miles you can drive. This is usually 36,000 miles for a 3 year lease. The lessee is then penalized from $0.05 to $0.20 for every mile driven beyond the limit. Let's say you lease a vehicle with a 36,000 mile limit. At the end of the lease the vehicle has 40,000 miles on it. If you are charged $0.20 per mile for excessive miles you will be forced to pay an extra $800 when returning the vehicle.
* You will be charged for "excessive" wear and tear when returning the vehicle. This is usually up to the discretion of the leasing company, so the fees can pile up quickly. Some leasing companies define "excessive" is anything that is not pristine.
* If you get into an accident in a leased vehicle, and your insurance company decides your vehicle is totaled you will only be paid the value of the vehicle, not what is actually owed on the vehicle. What you owe will be considerably more than the actual value, leaving you responsible for the difference of the two.
* After your lease term is up you return the vehicle to the dealer with nothing to show for the months of payments you made. You have built up no equity in the vehicle.
* If you fall into a cycle of leasing a new vehicle every 3 to 4 years there will never be a period when you are not making a car payment.
To conclude, if you need or want to drive a late model vehicle, plan on keeping it for only 3 years or so, and want to keep your payments down, leasing is a better option than buying a new car. Keep in mind though, that since this car or truck is essentially being rented by you, you have to be aware that there are certain responsibilities that come with leasing that do not with buying. Responsibilities like keeping the mileage below a certain amount, and avoiding excessive wear and tear. If the status of owning a new car is not an issue for you, and you are budget-conscious, purchasing a used car or truck is a great option.
