A new car is one of the most exciting and highly anticipated purchases. As a large, long term investment, it can also be one of the most stressful. Since there's really no ceiling marking how high car prices can go, the buyer's budget is usually the primary limiting factor, before extra options or aesthetics. Once you have your budget, there are two main questions to ask; new or used? And, perhaps the more impactful of the two, buy or lease? These questions go hand-in-hand and all four combinations (yes, it is possible to lease a used car) are important to explore because your choice could swing the overall price significantly. Below we'll help you compare the long term effects of each.
Leasing: the shiny option
Most commonly, someone who wants to lease a car will lease a new car—that is, after all, the point of leasing for most people. While it is possible to lease a used car, it's uncommon and not offered by every dealership. Leasing is the shiny option because you drive away with a brand new car by, basically, renting it for two or three years. You pay the costs of using the vehicle for the term of the lease instead of paying for the whole vehicle. This often results in lower monthly payments than those of someone buying a new vehicle through financing.
There will likely be a down payment and fees due up front, followed by a schedule of monthly payments. The lease might also end with additional fees. It's important to understand the terms of the lease, including any mileage limits and wear and tear fees.
Your lease deal is based on the difference between the transaction price (cost to buy) of the car and its residual value (what it will be worth when the lease is up). The dealer will divide the difference into your monthly payments. The other major factor influencing the lease is your credit score. Leases sometimes call for large down payments, and this will only increase with poor credit.
Buying: costly but financially smart
You want that new car but you can't afford to buy it, so leasing seems like the perfect option. But as in most life decisions, the financially smart option requires some sacrifice. In this case, being smart with your money probably means buying, rather than leasing. And that probably means buying a lower-cost new car, or a used car.
Some quick math, courtesy of average prices from Edmunds, shows that buying used is usually the best option in the long term.
If you lease an SUV that costs $27,142 (according to the Edmunds average), after fees and interest your monthly payment will be about $330 over 3 years. Out of pocket, then, leasing a new SUV for a total of six years will cost $27,836, or almost $3,000 more than buying a used SUV. However, leasing would be cheaper than buying the same new SUV (with financing plus down payment).
The problem is that, even though you saved on monthly payments by leasing rather than buying the new car, you don't own anything after the lease ends. So after six years and two leases, you've spent $27,836 on a vehicle that you still don't own. On the other hand, a purchased car can be traded in after those six years. After its trade-in value is subtracted, the same new SUV would cost only $23,882 to buy. In the long run, buying is the better choice.
That's a large savings, and it comes without the limits put on lessees by the contract they'd have entered into with the dealership. Yet, it's still not the most frugal option. New cars face immense depreciation and, despite warranties and promises by the dealership, will probably require several part replacements or repairs in six years. Buying used remains the wisest choice, though it might not be the advice you want to hear. In this example, buying a similar SUV used and trading it in after the same six years would cost almost $9,000 less than leasing the new one.
The truth is: buying used is hardly a loss. Certified preowned vehicles are often in outstanding shape and most vehicles don't change significantly in three or four years, anyway.
Although monthly payments on a lease might be lower than those for financing a new car, buying the new car is the better value in the long run. And, of course, buying a used car is your best option overall.
Tom Twardzik is a writer covering personal finance, productivity and investing for Paypath. He also contributes pop culture reviews for Popdust and travel writing for The Journiest. Read more on his website and follow him on Twitter.