Buying vs. Leasing a car (plus New vs. Used)

[ua_guy]

The caveat with buying new is you need to get it at a steep discount. That, and plan on owning it for a long time to get the most value out of it. There are some real traps out there. Every new car I've purchased has had thousands of dollars piled on the hood between manufacturer rebates, financing rebates, and dealer cash. IMO that's the only way to buy new. Sometimes it requires you to be flexible on some options because these vehicles are special in some way-- the dealer wants it off their lot. Either it's the oldest inventory, or is an unpopular configuration (manual transmission, for example).

My latest car deal was this:

I bought a 2014 Chevrolet Camaro new in 2014 for $18,600 before tax, title, license. MSRP was almost $25k. It was an old inventory unit with a manual transmission, one of two just like it left on the lot that the dealer wanted GONE.

I drove it for a year and put 15k miles on it.

I found a 2015 Chevrolet Silverado, new, advertised for $38,300. MSRP was just under $45k. If I financed the vehicle, I got an additional $1500 off, bringing the price down to $36,800. The financing rebate forced me to use GM's preferred bank, but the rate and term were the same as the financing I already had lined up through a credit union.

I negotiated a trade value of $18,500 for the Camaro which was roughly the average book value for the trade. In my state, the trade value offsets applicable tax on the new vehicle purchase. At 8.9%, that exempted me from $1646.50 in tax, bringing the total trade value to $20,146, which is right around $100 less than I paid for the vehicle (with tax) a year prior.

So I walked away having driven a brand new car for a year. All I had to do was put gas in it. Maintenance was free/ included for 2 years/24k.

I got a new pickup for $8200 off MSRP, and even if I had financed the whole thing, I'd still be ahead in the value.

If the truck is worth $15k in 5 years I'll be happy. Actually, selling prices of similarly equipped 2010 model year Silverados are anywhere from $23k-$30k with average mileage.

Let's assume the truck costs me $3k/year for 5 years, so a total of $15k depreciation over 5 years.

Think it's possible to find a 60 month 100k lease on a well-optioned full-size pickup for $250/month? Probably not.

This is why I purchase, new. While it's more expensive than buying a used vehicle and hanging onto it for decades, if you make smart purchases you can absolutely best any lease deal. Rolling from a new car to a new car is not as bad as it seems; not recommended; but I did it because the opportunity presented itself; why not?

My used Camaro has been sitting on the dealer lot for almost 3 months advertised at $23,971, which they just dropped to $22,971. The finance manager clearly did not have a good understanding of the local market because the same dealership that sold me the Camaro is blowing out their 2015 model year inventory and they're doing the same deal on those base model Camaro's one year newer for $18,600. The dealer is selling my Camaro "certified used" with some kind of included warranty, however, those new ones (as did mine) come with a 200k mile powertrain rider from the selling dealer.

Know the car, know the market...

[disneysteve]

The math is easy:

2015 Honda Accord LX CVT MSRP $23,725

Buy it for $21,500 cash ($250 below invoice price, pretty good price but you could probably get it for $21,000)
Loan for $21,500 60 mo @ .9% = $22,010 (current Honda deal)
Lease it for 36 months and then buy it = $21,686 (current Honda deal)

At the end of all 3 scenarios, you own a 2015 Honda Accord LX CVT.

Cash = cheapest
Lease = $186 more
Loan = $510 more

The cash and the lease are about the same. And mileage doesn't matter because in all three scenarios, you own the car.

What am I missing?

Tom, you're missing the fact that most people don't do what you've illustrated. Most people who lease a car for 3 years then return the car at the end of the term and lease another car, then another, then another. So they have an endless car payment whereas the person who paid cash or bought over 3 years owns their car and, once paid off, has no car payment for the remainder of time they own the car over time, they come out tens of thousands of dollars ahead of the serial leaser.

The other problem is that people generally use leasing as a way to live beyond their means and drive a car that they couldn't otherwise afford.

[corn18]

Tom, you're missing the fact that most people don't do what you've illustrated. Most people who lease a car for 3 years then return the car at the end of the term and lease another car, then another, then another. So they have an endless car payment whereas the person who paid cash or bought over 3 years owns their car and, once paid off, has no car payment for the remainder of time they own the car over time, they come out tens of thousands of dollars ahead of the serial leaser.

The other problem is that people generally use leasing as a way to live beyond their means and drive a car that they couldn't otherwise afford.

Gotcha. The never ending lease is definitely not a smart financial strategy for most people.

[Weird Tolkienish Figure]

Gotcha. The never ending lease is definitely not a smart financial strategy for most people.

Is the never ending "trading in a car every three years" strategy any better?

Not being facetious, it'd be interesting to see the math.

We all know dealerships aren't losing money on either option.

[corn18]

Is the never ending "trading in a car every three years" strategy any better?

Not being facetious, it'd be interesting to see the math.

We all know dealerships aren't losing money on either option.

I don't know the answer to the question. ua_guy seems to be doing well at it. I would lose money for sure.

[Weird Tolkienish Figure]

I don't know the answer to the question. ua_guy seems to be doing well at it. I would lose money for sure.

You lose money on cars either way. They are depreciating assets subject to continuous wear and tear on (in many cases) deteriorating infrastructure. They are money pits.

Almost nobody makes money on cars.

[ua_guy]

You lose money on cars either way. They are depreciating assets subject to continuous wear and tear on (in many cases) deteriorating infrastructure. They are money pits.

Almost nobody makes money on cars.

I was going to say-- No, it's not the cheapest option. But a controlled bleed of money if you have "new car" syndrome like I do. A better recommendation is to kick the habit entirely.

Dealers make money on cars. Investors make money on fine cars. For the average consumer, car buying is a pure expense, and potential financial nightmare.

[disneysteve]

Is the never ending "trading in a car every three years" strategy any better?

Nope. It's probably worse.

If you are dead set on having a new car every 3 years, leasing is the way to go for sure. But that's just an incredibly poor decision financially speaking.

The cheapest way to drive is to buy used and keep the car long term. There's really no math that can disprove that.

I bought my last car used in 1998 and kept it until 2012. There's no way anybody is going to convince me that it would have been cheaper to lease or to have bought new instead.

I bought my current car used in 2012 and fully expect to keep it for at least another 7-9 years.

That's the way you save money.

[greenskeeper]

This is the one case where I'd say a new car is a no-brainer. Years ago, this never happened, but it's a phenomenon that has popped up from time to time more recently due to economic issues and supply and demand. Especially during the recession, car makers were having trouble selling new cars so they kept the prices low which sometimes meant the new models were very similarly priced to the 1 or 2-year-old models. In that case, the new car is clearly the way to go, especially if they were offering 0% financing. All of that is generally an anomaly though.

the "cash for clunkers" fiasco took a lot of serviceable used cars out of the marketplace and it has yet to fully recover.

[disneysteve]

the "cash for clunkers" fiasco took a lot of serviceable used cars out of the marketplace and it has yet to fully recover.

Yep. That was a disaster for the market. It screwed with the supply/demand curve for years.

[greenskeeper]

I ran the numbers on the last vehicle i got rid of. I keep all of my service records.

1998 VW Jetta TDI

bought used in 2003 for $6k

total repair cost after 12 years of ownership $3190 (no major failures, mainly tires, brakes, etc)

sold in April 2015 for $1600

$6000 + $3190 = $9190 total cost of ownership (not including fuel)

$9190 - $1600 = $7590

$7590 divided by 144 months = $54/month

I'd like to be able to go back and add costs for leasing a Jetta for the past 12 years and purchasing a new one every 5.

FWIW during those 12 years my "car payment" was putting extra towards our mortgage and retirement plans, and we did this as if we were financing two vehicles!

[HappySaver]

In terms of leasing versus buying, it really just depends on how long you plan to own the car. If you plan to sell it within three years, you're usually better off leasing assuming you pick a lease with good terms. Of course switching cars often is the most expensive option no matter whether you buy or lease.

After 8 years or so is when you really reap the financial benefits of long-term ownership.

One note about buying used cars, especially ones that have been returned to the dealer after a lease. At least in the Northeast there have been several news reports of people rolling back their miles on the odometer so that they're not charged by the dealer for going over their allowed miles. This problem appears to be much more widespread than people realize as new digital odometers are apparently easier to "crack" then the old kind. I have a co-worker, let's just say not the most ethical person in the office as a huge understatement, who hinted that her "broker" did this with her leased car before returning it to the dealer.

This is one of the reasons I'm more comfortable buying only as much car as I can afford new. The only car I ever bought used, I bought from a trustworthy private party. I don't at all trust buying a used car from a dealer.

[HappySaver]

Here is an article stating that 1 in 10 used cars has a rolled back odometer:

http://wpri.com/2015/02/26/report-1-in-10-cars-has-rolled-back-odometer/

[pflyers85]

The math is easy:

2015 Honda Accord LX CVT MSRP $23,725

Buy it for $21,500 cash ($250 below invoice price, pretty good price but you could probably get it for $21,000)
Loan for $21,500 60 mo @ .9% = $22,010 (current Honda deal)
Lease it for 36 months and then buy it = $21,686 (current Honda deal)

At the end of all 3 scenarios, you own a 2015 Honda Accord LX CVT.

Cash = cheapest
Lease = $186 more
Loan = $510 more

The cash and the lease are about the same. And mileage doesn't matter because in all three scenarios, you own the car.

What am I missing? If I hate the car, at least with the lease I can give it back (the mileage limit matters for that). All I see is that leasing is not the devil incarnate and may not be as stupid as everyone makes it out to be.

BTW, I own all my cars. And would not lease one. Until I ran the math and saw the difference is only $186. Seems stupid not to. Heck, the cost of money alone would more than make up for that small difference.

Tom

Generally that rule works well for cars like Honda Accords, Civics or Toyota Camry's and other reliable cars that do not depreciate at the rate of other vehicles. The problem you could get into with other makes and models is if the residual value is higher than the true market value at the time of the buyout. My brother was a service manager at a Honda dealer and I spoke to one of the salesmen over there that also pointed out something else to consider. He advised to also look out for when a model series goes through a redesign or moves on to the next generation. Many times what happens is the value of the car on the last generation of that series plummets in value because of the demand for the newest generation.

[bjl584]

I've never leased a car.

I have however bought both new and used cars. There are arguments to be made for both. I've never had regret about doing either. There is something nice about having a brand new car. No miles, full factory warranty, no dents or dings, everything works. On the other hand, there is something to be said for a used car too. Cheaper to buy, not such a big deal when it gets dented and dinged, no or very low car payment.

For me, it's usually come down to affordability. I bought my current truck in 2011. It was brand new. I could comfortably afford it, so I decided to buy new. It is now 4 years old, has 46,000 miles on it, and is completely paid off. I plan to keep it for at least 10 years. Longer if it doesn't give me too much trouble.