Buying a New Car vs. Buying a Used Car

How does the cost of buying a new car compare to leasing the same car? And if you decide to buy a used car, how much would you save over buying or leasing a new car? Finally, what impact will those decisions have a few years from now when you're ready to shop again?

It's hard to give one definitive answer that covers all people and all situations. But here's the short version: If your primary concern is making the most sensible financial decision, we recommend buying a used car, paying it off and keeping it for a few years.

Used cars aren't for everyone, however. If you want the latest technology or like getting into a new car every three years, buying new or leasing is the route to take. If a low monthly payment is your primary goal, leasing might be the best approach.

To compare the costs of leasing, buying new and buying used, we'll use a popular vehicle in our examples: a compact SUV. The average car owner in the U.S. keeps a vehicle for 79 months — just over 6.5 years. That's the length of ownership we are assuming here. To match that period, we are basing the leasing example on two back-to-back three-year leases, totaling 72 months. You can see the other assumptions behind these examples at the end of the story.

Leasing: The average lease cost is based on a compact SUV that sells for $28,633 and has drive-off fees of $1,981. For the lease's interest rate, better known as the money factor, we've used the average amount: 0.009583. This results in a $360 monthly payment for three years. We used the same numbers for the second three-year lease.

Buying New: The average amount financed for a new compact SUV is about $28,905, with a down payment of $3,847. The average interest rate is 3.9%, resulting in a monthly payment of $482.

Buying Used: The average amount financed for a 3- or 4-year-old compact SUV is $19,331, with an average down payment of $2,771. The interest rate for used car loans is usually higher than for new, and in our case it would be about 7.9%. These factors result in a monthly payment of $356.

After six years, here are the total out-of-pocket costs for each financing method:

In terms of out-of-pocket spending, leasing costs $2,584 less over six years than buying a new car, excluding any maintenance and repair costs the new car might incur. The out-of-pocket cost of buying a used car is $5,547 cheaper than leasing and $8,131 cheaper than buying a new car. We have also excluded any repair costs for the used car.

What Did Your Money Get You?

Here is something essential to remember about the apparent lower cost of leasing versus buying new: At the end of a leasing cycle, you don't own the car. Generally speaking, you have to start a new lease-or-buy cycle.

But if you'd bought a new car and were now at the end of the ownership cycle, you'd have a 6-year-old vehicle that would have about 72,000 miles on the odometer. It would have depreciated an estimated 66% and be worth about $11,136 as a trade-in, according to Edmunds data.

If you'd bought a used car, it would now be around 9 years old. It would have about 108,000 miles and be worth about $5,968 as a trade-in — a depreciation of roughly 73%.

You could potentially earn a couple thousand more dollars by selling your vehicle to a private party. But most people are likely to opt for the convenience of a trade-in at a dealership.

When we deduct that used car equity from the out-of-pocket costs of acquiring the car, the long-term cost picture changes. Buying new becomes a better deal than leasing. But buying used is still the thriftiest way to go.

In this basic comparison, if you'd leased two compact SUVs back to back, you would have paid $8,552 more to drive them for six years than you would if you bought a new vehicle.

If you'd bought a used compact SUV, you would have saved $11,515 over leasing during this six-year cycle. Buying used rather than buying new would have saved $2,963.

Leasing Advantages

Leasing doesn't look great in this dollars-only analysis, but there are factors in its favor:

• Since a lease is usually for three years, the vehicle is always under warranty. You avoid the hassle of out-of-warranty repairs and costly maintenance. You do have to pay for routine maintenance, but that usually involves just oil changes and tire rotations. You can avoid maintenance costs altogether if you lease a new car that has a free maintenance program.

• You have the opportunity to buy the leased vehicle. The finance company sets the purchase price at the beginning of the lease, and often that's the current market value of the vehicle at the end of the lease.

• Leasing protects you against unexpected depreciation. If the market value of the car unexpectedly drops because of a shift in the market, brought about by such things as rising gas prices, you aren't hurt. Conversely, if the lease car holds its value especially well, you can buy the car at a bargain price at the end of the lease and either keep or resell it. In some cases, people can leverage the equity in leased cars.

• Leasing offers an attractive tax deduction if you use the car for business. An accountant is the best resource for more information on this subject.

Other aspects of leasing are more difficult to monetize but appeal to some shoppers:

• Leasing offers the enjoyment and prestige of driving a newer car more often.

• Leasing provides a new car that has the latest safety, technology and comfort features.

Ownership Advantages

Once you've paid off a car, ownership has several advantages over leasing:

• You're free to bank or invest the money that you used to spend on your monthly payment. You also can apply that money to household expenses or set it aside in a repair and maintenance fund for the car you own.
• You have the flexibility to sell the car when you want to, not when the lease is up.
• You can modify the car exactly as you want without fear that you'll break the terms of your lease contract.
• You don't have to worry about excess wear and tear, which you could be required to pay for on a leased car.
• You don't have to worry about excess-mileage penalties.

Remember that financing a new or used car only starts to make financial sense when you've paid the loan in full. You need to keep the vehicle for a while to enjoy months or years without car payments. But of course, if you drive the car for years and years and pile on the mileage, you diminish its value. Unless it's a classic vehicle, a car is a depreciating asset.

Consider Your Lifestyle

While on paper the used vehicle might be the least expensive option, you might not be comfortable handling repairs on an aging vehicle. Or if you've always purchased your vehicles only to get bored with them in a few years, leasing might be the better option. Do your own calculations, factor in the intangibles, and the best decision for you will emerge.

How We Arrived at the Numbers

Here are the assumptions we made for the three scenarios:

• Length of ownership: For new and used cars, we used the current average car-ownership period of 79 months, or just over 6.5 years.
• Length of lease: Most people lease for three years. We assumed the costs involved two lease cycles (72 months) to better match the 79-month ownership period for new and used cars.
• Average new car loan term and interest: The average loan term for a new car in early 2021 was 68.3 months, or just under six years. We assumed a 72-month new car loan, which is close to the 68-month average and matches the length of leases in our leasing example.
• Average used car loan term and interest: The average used car loan is about 68 months, practically the same as a new car loan. We used a 72-month loan to remain consistent with the other scenarios.
• Source of the information: For each financing method, the average cost of the vehicle, interest rate, down payment and monthly payment are based on Edmunds data covering thousands of recent transactions across the United States.