Leasing Vs Buying Used PATCHED
How does the cost of buying a new car compare to leasing the same car? And if you decide to buy a used car, how much would you save over buying or leasing a new car? Finally, what impact will those decisions have a few years from now when you're ready to shop again?
leasing vs buying used
It's hard to give one definitive answer that covers all people and all situations. But here's the short version: If your primary concern is making the most sensible financial decision, we recommend buying a used car, paying it off and keeping it for a few years.
Used cars aren't for everyone, however. If you want the latest technology or like getting into a new car every three years, buying new or leasing is the route to take. If a low monthly payment is your primary goal, leasing might be the best approach.
Leasing: The average lease cost is based on a compact SUV that sells for $28,633 and has drive-off fees of $1,981. For the lease's interest rate, better known as the money factor, we've used the average amount: 0.009583. This results in a $360 monthly payment for three years. We used the same numbers for the second three-year lease.
Buying Used: The average amount financed for a 3- or 4-year-old compact SUV is $19,331, with an average down payment of $2,771. The interest rate for used car loans is usually higher than for new, and in our case it would be about 7.9%. These factors result in a monthly payment of $356.
In terms of out-of-pocket spending, leasing costs $2,584 less over six years than buying a new car, excluding any maintenance and repair costs the new car might incur. The out-of-pocket cost of buying a used car is $5,547 cheaper than leasing and $8,131 cheaper than buying a new car. We have also excluded any repair costs for the used car.
Here is something essential to remember about the apparent lower cost of leasing versus buying new: At the end of a leasing cycle, you don't own the car. Generally speaking, you have to start a new lease-or-buy cycle.
When we deduct that used car equity from the out-of-pocket costs of acquiring the car, the long-term cost picture changes. Buying new becomes a better deal than leasing. But buying used is still the thriftiest way to go.
You're free to bank or invest the money that you used to spend on your monthly payment. You also can apply that money to household expenses or set it aside in a repair and maintenance fund for the car you own.
You have the flexibility to sell the car when you want to, not when the lease is up.
You can modify the car exactly as you want without fear that you'll break the terms of your lease contract.
You don't have to worry about excess wear and tear, which you could be required to pay for on a leased car.
You don't have to worry about excess-mileage penalties.
Remember that financing a new or used car only starts to make financial sense when you've paid the loan in full. You need to keep the vehicle for a while to enjoy months or years without car payments. But of course, if you drive the car for years and years and pile on the mileage, you diminish its value. Unless it's a classic vehicle, a car is a depreciating asset.
While on paper the used vehicle might be the least expensive option, you might not be comfortable handling repairs on an aging vehicle. Or if you've always purchased your vehicles only to get bored with them in a few years, leasing might be the better option. Do your own calculations, factor in the intangibles, and the best decision for you will emerge.
Length of ownership: For new and used cars, we used the current average car-ownership period of 79 months, or just over 6.5 years.
Length of lease: Most people lease for three years. We assumed the costs involved two lease cycles (72 months) to better match the 79-month ownership period for new and used cars.
Average new car loan term and interest: The average loan term for a new car in early 2021 was 68.3 months, or just under six years. We assumed a 72-month new car loan, which is close to the 68-month average and matches the length of leases in our leasing example.
Average used car loan term and interest: The average used car loan is about 68 months, practically the same as a new car loan. We used a 72-month loan to remain consistent with the other scenarios.
Source of the information: For each financing method, the average cost of the vehicle, interest rate, down payment and monthly payment are based on Edmunds data covering thousands of recent transactions across the United States.
Leasing allows a person to get a new car every few years. It can keep their payments relatively stable when leasing the same make and model of car over various leases. Leasing also frees the lessee from having to dispose of the car at the end of the lease term.
Leasing and buying are both valid ways to get your hands on a new vehicle. Buying offers fewer restrictions than leasing on how much you can drive and what you can do with the vehicle. Plus, you own the vehicle at the end of the loan. But leasing is a less expensive option month-to-month if you want to get into a luxury car.
Buying a vehicle means you maintain possession of the car instead of leasing it for a few years. If you are looking for a brand-new car, it can have a big price tag. The average cost of buying a new vehicle in June 2022 was over $48,000, according to data from Kelley Blue Book.
What are those "dynamics" exactly? In a nutshell, the supply of used and new cars has plummeted to extreme lows, while prices have soared to ridiculous highs. The main culprit is a computer chip shortage that's constrained vehicle production for months, but other factors have contributed too.
It all means that navigating a car purchase has become much more of a headache than before. Faced with dwindling options and eye-watering price tags, shoppers' central decision of whether to buy new, lease a car, or buy used has gotten substantially more challenging.
Leasing has another appeal nowadays: as a stopgap measure to avoid the chaotic car market. Those reluctant to hunt frantically for a vehicle or who can't afford to pay today's absurd markups may be better off leasing temporarily until the market settles down, Drury said.
Shoppers traditionally found the most value on the secondhand market, but that's less clear as of late. Used-car values have shot up roughly 30% over the course of the pandemic, according to Edmunds, meaning that some lightly used vehicles cost as much or more as their new counterparts. Before deciding to stomach the inflated prices, Drury recommends that buyers do plenty of research and make sure they plan to keep their vehicle for an extended period.
You may hear car leasing likened to leasing an apartment, and there are similarities between the two. When you lease a car or an apartment, you lease the property for a specific amount of time. You and the property owner have a mutual understanding that the assets will be returned in good condition.
Yet there are additional considerations for leasing a car that you will not have when leasing property. Many car lease agreements last two to three years and typically allow you to purchase the car at the end of the term. Car lease agreements limit the number of miles the vehicle can be driven annually, generally between 12,000 to 15,000 miles. If you exceed the agreed upon mileage, you may owe around 25 cents per extra mile.1
Typically, leasing a car does increase your insurance premiums because you are required to purchase full coverage to ensure there are sufficient funds available to repair the car in the event of an accident. The entity financing the vehicle typically requires this because they have a financial stake in the car.5 Full coverage includes collision coverage and comprehensive coverage. These not only provide coverage in the event of accidental damage, but also theft or vandalism, should the car be damaged during the term of your lease.
There are various strategies to help save money when buying your leased car, including financing through your bank or working directly with the lender (the creditor that owns the car). If you decide to buy the leased car, explore all your options.
As with most personal financial decisions, the pros and cons of leasing a car come down to a host of factors. Analyze your needs and budget and then shop to make sure you make the right decision for you.
Sources:1 -shopping/5-reasons-buying-your-leased-car-2091582 -leasing/quick-guide-to-leasing-a-new-car.html3 -buying/compare-the-costs-buying-vs-leasing-vs-buying-a-used-car.html4 5 -leased-car
The downside to leasing is that you get no equity in the car. When the lease is over, you have the option to buy, which due to current market circumstances is attractive but may not always be. Also, picking up a lease every couple of years results in an endless cycle of payments that will certainly cost more than purchasing a vehicle and keeping it for a decade or more. There are also limitations on what you can do with your vehicle.
This is an especially significant risk in 2022, as many new and used vehicles are selling far above historical values or MSRPs. The resale value of those vehicles may not hold up as well if inventories and prices fall back to historical norms in 2024 or later. While a dealer may mark up a $20,000 Nissan Versa to $32,000 because of inventory shortages, in five years that same Versa is likely to be worth a fraction of the original MSRP. What goes up will eventually come back down, and when faced with a markup that massive, a lease is a better call.
The biggest difference between buying and leasing a vehicle comes down to ownership. Buyers build equity with every loan payment and have the option to sell their vehicle. Whatever the difference is between the sale price and the loan is theirs to keep.
Over the long run, leasing is the more expensive option compared to buying a car and driving it into the ground, but record-high prices for new vehicles and a shortage of fairly-priced used vehicles are two good reasons to weigh both options. 041b061a72