Understanding the Differences

Deciding on the make and model of a vehicle is only a small part of today’s car-shopping experience. You also have to think about whether you want a new or used vehicle, or whether you want to lease.

Not sure what is right for you? Take a look at these key differences:

  • Buying new: That new-car smell means nobody has sullied the interior or dinged the paint. Any major problems are likely to be covered by a warranty. You can get all the features you want in the color of your choosing, but the sticker price for these perks can be high.
  • Buying used: Cars depreciate, or lose value, with every year of use. When you buy used, the sale price takes this deprecation, as well as vehicle wear and tear, into account. That means you may be able to get a car that might have been out of your price range when it was new. Because used cars are generally less expensive, your loan (if you need one) will be for a smaller amount. One drawback: even after reviewing a car’s accident history and maintenance records, you can’t always be sure how well previous owners have treated the vehicle.
  • Leasing: Leasing is sort of like renting, except you get the car for a longer period of time. One reason people choose to lease is that it allows them to drive a higher-priced, better-equipped vehicle than they can afford to buy. Monthly lease payments are typically less than those for a standard auto loan, but at the end of the lease, you don’t actually own the car. Most leases offer a purchase option that allows you to buy the car at the end of the lease instead of returning it. However, when you factor in your previous lease payments and the final purchase price, the price is often more than if you had bought the car outright. 

Which Is Right for You?

There are advantages and disadvantages to each car-shopping option. Ask yourself these questions to decide which one is right for you:

  • How much can you spend on a monthly car payment or lease? Your monthly payments will be less if you buy used or lease.
  • How many miles do you put on a car every year? Leased vehicles have set mileage limits. You can pay a hefty penalty for exceeding this limit.
  • Can you afford to pay for car repairs? Many repairs to new and leased vehicles are likely to be covered under warranty. A used car may not have a warranty and may need more repairs due to years of wear and tear. 
  • How important is it to drive the newest, latest model? A lease can put you behind the wheel of a high-end vehicle with all of the bells and whistles for less than buying new.
  • How important is trade-in value? Unless you purchase a leased vehicle at the end of the agreement, you won’t actually own a car or have equity in a car after your years of payments. 
  • How secure is your financial situation? If your job industry is experiencing cutbacks or the economy isn’t stable, you might not want to take out a large loan for a new car or enter into a binding lease agreement that penalizes you for early termination. 

Cost and Financing

Check this comparison of costs involved when buying or leasing a new car. Although the out-of-pocket costs are lower when you lease, you don’t own the car at the end of the lease. When you factor in the projected market value of the car at the end of the loan or lease period, your final cost is higher when leasing.

You have the option to purchase the car at the end of the lease. However, the price for the lease-end purchase option is likely to be higher than the price of a car of the same year, make and model from a used car lot.

Financial Overview After Three Years of Ownership

  Purchase Lease
Total out-of-pocket costs $21,556 $9,884
Car value (equity built through monthly payments)* $13,338 $0
Final cost of financing once equity removed** $7,718 $9,884

In this example, you may choose to sell your vehicle at the end of the term and roll that cost into the down payment on your next vehicle. With a lease, you have nothing to apply to your next vehicle at the end of the term.

*Equity calculated based on Edmunds True Cost to Own.
**Final costs equal total out-of-pocket costs minus equity.

Breaking Down Your Options

  New Used Leased
Ownership Yes Yes No
Monthly Payments Yes. Higher than buying used or lease. Yes, unless you pay in cash. Lower than buying new but may have slightly higher interest rate. Yes. Lower than buying new and sometimes used.
Trade-in Yes. You can sell or trade the car at any time. Yes. You can sell or trade the car at any time. No. High penalty for terminating lease early.
Mileage Unlimited Unlimited Limited by contract terms, or you pay a per-mile excess fee

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