When in the market for a car or truck, many consumers compare the benefits of leasing a car versus buying a new car. There is a third option that is often neglected: buying a gently 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 plan to keep the vehicle for the medium to long term (5+ years). To take it a step further, buying a gently used vehicle is a better option than buying a new vehicle, as new cars or trucks lose an average of 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 more detail by comparing the advantages and disadvantages of each.
Historically, buying a new car or truck has been the preferred option for Americans. But as the cost of new vehicles has risen, vehicles now last longer than ever, access to used vehicle inventory has increased, and the information available about used cars has improved thanks to CARFAX, Carchex, and car research sites like Edmunds. a shift in what consumers are willing to buy from new cars to used cars. Used cars now outsell new cars at a rate of 3 to 1. Yet American’s love affair with the new car lives on. Let’s take a closer look at the advantages of buying a new car or truck.
* The interest rate you receive on a new car loan will be lower than if you bought a used vehicle.
* A warranty will cover all major repairs for the first 3 years or more of ownership, keeping repair costs low.
* The vehicle has no hidden history to discover.
* That intangible benefit of the smell, look and feel of a new car.
If you are considering buying a new car or truck, in addition to paying more for the vehicle, there are other negatives to consider:
* New vehicles are generally more expensive to insure.
* New vehicles cost significantly more than a 2-3 year old used car and depreciate in value much faster.
* Unknown history of safety and reliability. You’ll have a basic idea of a new car’s reliability from data from previous model years, but there’s still a chance of a new problem arising.
If cost is an important factor and the smell of a new car is not a requirement, buying a used car or truck is a great option. These are the advantages of buying a used vehicle:
* The vehicle has already seen its biggest depreciation since cars and trucks lose most of the value in the first year of ownership.
* In general you do not have to pay sales tax. Check with your state DMV to confirm that each state has different requirements.
* Purchase price will be less than 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 of years, it will be easier to determine the repair and maintenance history of that model.
Of course, there are downsides that come with buying a used vehicle. Although you can expect to pay less for a used vehicle, the downsides of buying 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 if you bought a new car. You can expect to see 2% higher interest rates.
* Warranty will expire faster. If you buy a 2 year old vehicle with an original 4 year warranty, the vehicle will be out of warranty in 2 years. You may want to consider an extended warranty, also known as extended service protection.
* Maintenance and repair costs will be higher. This goes hand in hand with warranty expiration, but there will also be more wear and tear that won’t be covered by the warranty before it expires.
* There is a fear of the unknown. A vehicle history report and professional vehicle inspection will help protect you from making a big financial mistake, but a new or leased vehicle will not have the potential for hidden history.
* In general, a used vehicle will not last as long as a new vehicle.
Now that we’ve looked at buying a vehicle, let’s consider the benefits and costs of leasing a vehicle. When you lease 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 only pay for the vehicle’s depreciation, plus finance charges, taxes and fees. So if you’re leasing a vehicle that costs $25,000 and it loses $12,000 in value over 3 years, your monthly payments will only include the $12,000 depreciation and the aforementioned finance charges, taxes and fees. If you decide to purchase 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 center around ease and convenience.
* Monthly lease payments are much lower than new car loan payments (but in line with used car payments).
* The initial payment of the lease option is usually low; you usually only need to get money for your first month’s payment, a security deposit, and fees.
* Leases are easier to obtain than auto loans.
* Because leases are typically 3-4 years and most new car warranties are longer than 3 years, maintenance costs are low.
With the advantages of leasing also come the 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 typically 36,000 miles for a 3-year lease. The renter is then penalized $0.05 to $0.20 for each mile driven over 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. If you are charged $0.20 per mile for excess mileage, you will be forced to pay an additional $800 when you return the vehicle.
* You will be charged for “excess” wear and tear when returning the vehicle. This is usually at the discretion of the leasing company, so fees can add up quickly. Some leasing companies define “excessive” as anything that isn’t pristine.
* If you are in an accident in a rental vehicle and your insurance company decides your vehicle is totaled, you will only be paid for 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 the lease term ends, you return the vehicle to the dealer with nothing to show for the months of payments you made. You have not accumulated equity in the vehicle.
* If you fall into a new vehicle lease cycle every 3-4 years, there will never be a period where you are not paying for a car.
To conclude, if you need or want to drive a late-model vehicle, plan to keep it for about 3 years, and want to keep your payments low, leasing is a better option than buying a new car. Keep in mind, however, that since you are essentially leasing this car or truck, you should be aware that there are certain responsibilities that come with leasing that not with the purchase. Responsibilities like keeping mileage under 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 minded, buying a used car or truck is a great option.