By Philip Reed, Senior Consumer Advice Editor, Edmunds.com
Since most people don't have the cash to buy a new car, it often comes down to a decision between leasing and buying with the help of an auto loan. Here is a quick look at the main benefits of each type of car financing.
First, it's important to understand that the decision of whether to buy or lease isn't just a dollars-and-cents decision. It depends on the intangible importance you give to owning a new car. If the image of driving the latest model is essential to you, then you'll justify spending more money for this privilege. If you look at a car as merely transportation, then owning the newest car on the block will be lower on your priority list. Give these questions some thought as we move on to the more tangible issues of buying with the help of an auto loan versus car leasing.
There are several aspects of car leasing that make it very appealing: Low down payments, low monthly payments, low maintenance costs. However, the main advantage is that a customer (with good credit) can get a car without putting much money down, and the monthly payments will be lower than if you bought the car with the assistance of an auto loan. Furthermore, since most cars are under warranty for three years, the car will be fully covered for mechanical breakdowns during the length of the lease. (Note: Edmunds.com editors recommend three-year leases as making the most financial sense.)
So far, car leasing sounds almost too good to be true. There is a drawback, however. Once you start leasing, you always have a car payment. When you get to the end of your auto lease, you have to begin leasing again, or buy the car. When you buy the car, you eventually pay the car off and actually own it. At this point, you can continue driving the car as long as it runs. Sometimes this is another five, six or seven years. And for those years, your expenses are minimal.
In the following example, we show you what it costs to buy and own a new or used car or to lease a car for 10 years. In these examples, we assumed that the car was worth $20,000 when new and was financed at a 6 percent interest rate. Also, in each case, a down payment of $1,000 was made. These figures are estimates to give you a comparative feeling for these different car financing scenarios.
Purchase your car with the help of an auto loan, and you will make higher payments for the first five years, but then you will own it. Over 10 years, this averages $191 a month or a total cost of $22,920, not including insurance, maintenance and the like.
Purchase your car with the help of an auto loan, and you will lease more than three times, each time making an initial payment of $1,000 and monthly payments of $323. For 10 years, this is a total of $41,760.
If — with the help of an auto loan — you buy a four-year-old used car for $8,000, put down $1,000, and pay it off in three years, your average monthly ownership cost will be $63 for a total of $8,632 for a 10-year period. Of course, a used car might require more maintenance, but if you allow an additional $5,000 for repairs, your total is still less than $14,000.
Clearly, car leasing is the most expensive way to go. But those people in favor of leasing will point out that, over that 10-year period, they drove three different new cars while the people in the other two scenarios drove the same car. Furthermore, those driving the older cars probably made at least one major repair as the vehicle aged.