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“With the leased option, you own nothing.”It’s the dilemma that every car buyer has grappled with at least once: Should I go with a new, used or leased vehicle?
Unforgiving misers will tell you that “new vehicles lose 10% of their value the second they are driven off the lot” and consider the case closed. Quality-of-life seekers will argue that the value they receive from owning the car that they’ve always wanted brand new — whether purchased or leased — is priceless.
Wherever you stand on the issue, it’s important to at least crunch the numbers, understand your purchasing style and take a holistic approach to deciding on your next car. Here’s how.
Philip Reed, Senior Consumer Advice Editor of automotive website Edmunds.com ran a test looking at the five-year total ownership costs of buying a new $20,000 vehicle and driving it 12,000 miles annually versus leasing the same vehicle or buying a used version for $10,000. Reed didn’t clarify how old the $10,000 vehicle would be, but based on common resale value percentages and dealer markup, we estimate that it would be about five years old (which is important later on in our analysis). What he found was intriguing from a financial-geek point of view.
The total costs for each scenario ended up being:
# New buy: $32,388 # New lease: $32,140 # Used buy: $18,390
Clearly, in this example, buying the new car seems to be the least cost-effective, right? Not so fast.
With the buy options, you would own the vehicle outright, and your vehicle would have an open market value if you decided to sell it. With the leased option, you own nothing. From purely a financial perspective, buying a car — whether it’s new or used — definitely makes more sense than leasing one. (And that’s even if you stay under your mileage penalty limit on a lease contracts.)
What’s not as clear, despite the wide price difference and conventional wisdom, is whether buying a new vs. used car makes more financial sense. When you factor in market value in the Edmunds example, the new car’s value after five years was $7,000, while the used car’s value was just $2,000. That would bring your total monetary commitment, if you were able to sell both vehicles, down to $25,388 for the new car and $16,390 for the used. Still a big difference, though: $8,998 in favor of the used car.