When it comes time to get a “new” car, one often asks, “To lease or to buy?”  The answer depends on your situation and personal preferences.  By understanding the differences between the three major car purchasing options, you can determine which option is best for you.

Leasing
When you lease a car, you make monthly payments for a set period of time that amount to the car’s depreciation (or the value the car loses over the term of the lease).  Rates of depreciation can vary significantly between different cars depending on a number of factors including perceived quality, supply, and popularity.  Some cars depreciate less than 50% over three years, while others depreciate 70% or more.

Interestingly, when accounting for these varying rates of depreciation, it is possible to pay less to lease a more expensive car.  This is caused by an “expensive” car having a relatively low depreciation rate.  For example, a Cadillac CTS may depreciate at a much slower rate than a Pontiac Sunfire.  Therefore, though the Cadillac is much more expensive to buy, it is relatively inexpensive to lease because of its slow depreciation rate as compared to the Pontiac.  Thus, one major advantage of leasing is the ability to get an “expensive” car at a relatively low rate.

Another advantage is that leases are usually short enough to avoid facing car problems that require major repair costs.  Therefore, in addition to driving a brand new car every two to three years, leasing generally allows you to spend less money on repairs that arise as a car ages.  However, leasing has a very large disadvantage- you have to start from “scratch” every time the lease expires.  Because of this, you will generally end up spending much more in the long run to lease than to buy.

Buying New
Assuming when buying new you do not pay the entire cost up front, you will make monthly loan payments until the entire car plus interest is paid.  Monthly payments will be much greater than lease payments because you are paying for the entire cost of the car as opposed to paying for just the depreciation.  At first glance, this appears to be a great disadvantage of buying.  However, once you eventually pay off the loan on a new car, you actually own the car.  Then, you can drive the car for years and eventually even sell the car to recoup some of your costs.  You will certainly endure repair costs that you may otherwise avoid during a lease, but in general, buying new is financially a better long term option than leasing.

One big disadvantage of buying new is the immediate and constant depreciation on the value of the car.  That is, as soon as you drive the new car off the dealer’s lot- the value of the car begins to go down.  This constant depreciation, or eroding of value, is almost inevitable and will slowly eat away at the car’s resale value regardless of its condition.  Nonetheless, over a long period of time, buying new is typically a better long term financial decision than leasing.

Buying Used
When you buy a used car, you can either buy from a private seller or from a dealer.  Buying used affords the buyer many of the advantages of buying new, without having to incur major depreciation in the value of the car.  That is, the original buyer normally has already incurred the bulk of the car’s depreciation and you can therefore purchase the car at a greatly reduced price.

The disadvantage to buying used is the uncertainty of the cars condition and the possibility of large repair costs.  Therefore, it is good to have a trusted mechanic inspect a used car before buying or buy a certified used car from a dealer.  Although you will pay slightly more than buying from a private seller, a certified used car has undergone professional inspection and usually includes some form of an extended warranty.  And, though you will likely encounter repair costs sooner than when buying new or leasing, buying used is generally less expensive in both the short and long term.

Conclusion
So, the question to ask yourself is, “What is the ultimate goal when it comes to a car?”  If you desire to drive a new car every few years that is a little bit nicer than you can normally afford- you should typically lease.  If you want a better long term financial decision while still driving a new car- you should typically buy new.  Or, if you want the choice that is the overall most sound financial decision- you should buy used.  In the end, your personal situation and preferences play a major part in your decision.  However, if you are simply comparing the options- buy used.

Written by CitrinGroup Staff 07/05/05