Looking to upgrade your car but not sure if you should lease or buy new? Read Fifth Third Bank's breakdown of costs and the pros and cons of each option!
For most Americans, vehicles are an important part of our lives and a major expense. Considering whether to buy new, used, or lease a car warrants a deep dive into the costs and the pros and cons of each option. Sure, picking the make and model requires some thought and research, but your financial picture is an essential factor—a big purchase like this can affect your finances for the next several years.
Pros and Cons of Buying a New Car
Buying a new car is generally the most expensive option, so it’s important to weigh the factors. The top drawback is the dramatic drop in value the minute that a new car crosses the dealership’s curb. Think of it this way: it’s most likely to be the most expensive minute of your life.
The moment you hit the street, the car’s value drops, or depreciates, by 20%. So if you bought the car for $37,000, its value instantly drops by $7,400. It’s worth $29,600 by the time you get home, and you’ll take the hit on this when you sell or trade in your car.
New cars are equipped with the latest technology for safety, fuel efficiency and emissions, but these advantages may not be worth the expense. The warranty is included in the price, but new cars rarely need major repairs in the first few years anyway. Insurance also costs more for vehicles fresh off the dealership lot.
When it comes to financing, auto-loan interest rates are usually lower for new cars. Rates vary, however, and it’s best to shop around for the best financing and get pre-approved for a loan first, then see if a dealership can beat it. Beware that you might only find high-interest rates if the loan-to-value ratio (the total dollar value of your loan divided by the actual cash value of the car) is too high.
New Cars vs. Used Cars
Unlike buying new, a used car doesn't sell at the top price and suffer instant, steep depreciation. Instead, the first owner bore that burden, and you can expect to save about 30% on the price, plus a slower depreciation rate. A lower price tag means less to pay in taxes and insurance is less expensive, too.
Auto loans for used cars carry higher interest rates than new cars, but the lower purchase price compensates for that. You’ll save on the total amount of interest you pay in the long run.
Some people may harbor an aversion to used cars because they have a past. However, this is much more transparent these days—online resources let you easily check a vehicle’s history. It’s relatively simple to look up a car’s record of maintenance and repairs, its previous owners, and if it was ever in an accident. Once you’ve made it to a point when you’re ready to buy a particular vehicle, you should pay an unbiased mechanic to inspect it.
A great way to resolve any prejudice you may have regarding used cars is to shop for a certified pre-owned car—a used car that has been thoroughly inspected, refurbished and certified by a manufacturer or a dealer. These are usually late-model vehicles that come with special financing, an extended warranty, and other perks such as a free vehicle history report and roadside assistance. In this category, they usually cost more than other used cars, but it may be worth it.
In general, today’s used cars are a better value than in the past because cars are built to require less maintenance and last longer. Some models run reliably for more than 100,000 miles without major repairs. The savings you reap with a used car could allow you to upgrade to a more luxurious car than you thought you calculated you could afford.
Leasing vs. Buying a Car
If you must have a new car, leasing usually lets you do it with a lower monthly payment compared with buying one. Instead of paying for the car, you pay the amount of the car’s depreciation during the term of the lease (usually two or three years), along with interest and fees. You can keep getting a new car every few years at that lower monthly payment rate with a perpetual warranty.
Some drawbacks to consider, however, include that you have no equity in the car, so you could never sell it to put cash toward buying another vehicle. You don’t own the car, but you will always have that monthly car payment. You’ll likely need to pay gap insurance, which will cover the amount you owe on the lease in case of car theft or an accident which results in a total loss of the car’s value.
If you have bad credit, plan to drive long distances, love to customize your car, get it fixed wherever you like and care for it casually, leasing likely isn’t for you. To lease, you typically must have a good credit score, obey mileage limits, refrain from making alterations, have it serviced at predetermined shops and return it in excellent condition.
Deciding whether to lease or buy requires considering your short- and long-term needs and preferences. Buying a car is more expensive in the short term—you pay interest and sales tax on the total cost of the car. But it has long-term benefits—after you pay off the loan, you have no more monthly payments and you can sell or trade it in.
Conversely, leasing tends to be less expensive in the short term, but typically more expensive in the long term. Using a lease vs. buy calculator can help sort out what’s right for you.
Whether you buy a new car, a used car or lease a car depends on your financial needs as well as what you need from your vehicle. Weighing all of these factors is important in finding the option that will keep you feeling satisfied, mile for mile.