So you’re thinking about buying a new car... It’s so exciting, isn't it?! Out with the old and in with the new! New features, new styling, and that glorious new car smell. Mmm.
But, when buying a car, how big of a difference does the way you buy it really make? We all know that buying a used car saves money, but how much? And if you have your heart set on a new car, does it make more sense to buy it outright? Or lease it through the dealership?
In this article, I’ll compare each of these options and show you just how big of a difference it really makes!
Me And Cars
Buying my first car was one of the most exciting events of my life. I’m a big sports car fan, so I knew which car I wanted years before I turned 16... a 3rd gen Toyota MR2 Spyder! 2 seats, mid-engined, manual, convertible. What more could a teenager ask for?! Sure, everyone made fun of me because it was about the size of a shoebox and had an antenna on the back (so it looked like an RC car), but I LOVED that thing. Driving back roads with the top down, rowing through the gears, and slinging around corners is something I’ll never forget. I can still hear the sound of a well timed downshift setting up for a corner.... *sign*.
I tell that story, one because it’s fun to reminisce, and two because I actually made money on that car. Turns out, I wasn’t the only one who loved MR2’s and someone drove 6 hours to buy it for more than what I paid, and a year later at that! Nice.
My next car purchase didn’t go quite as well... I wanted a luxury car, so I bought a V8 Lincoln LS. Everything checked out, interior and exterior were immaculate, and the engine ran smooth as butter. Little did I know, I was in for a nightmare of check this and check that lights, in and out of the repair shop, and thousands of dollars of depreciation. I lost $6,000... in 1 year.
After that disaster, I bought a new car. I wanted a warranty and no problems. So I bought a brand new Toyota Corolla with a 100k mile bumper-to-bumper warranty. Stress-free practicality at it’s finest lol.
So, I’ve had the gamut of car buying experiences and learned a lot along the way. I learned to buy with your brain and not with your heart, the tremendous value of a warranty, and most of all... I learned the massive impact of the invisible expense, depreciation.
Comparing The Cost: New, Used, and Leasing Cars
For our calculation we’re going to use a middle of the road family crossover, the beloved Subaru Forester.
In January 2020, you can buy a new Forester Limited for about $33,000 at the local dealership.
Buyer 1 finances it and has good credit, which gets him a rate of about 3%. So at 3% for 60 months, his monthly payment comes out to $610.94. He drives it 12,000 miles a year and sells it once he’s paid off the loan.
Buyer 2 decides to lease it and has good credit, which means she drives away for $861 down plus a $595 acquisition fee. Her monthly payment is $481 and that buys her 10,000 miles a year, but she usually drives about 12,000 miles a year (average) so that’ll cost her an extra $900 over the life of the contract (at $0.15 per mile). Once her lease is up, she turns the car in and leases another one.
Buyer 3 buys the car from Buyer 1, 5 years and 60,000 miles later. He goes to his local bank and borrows $18,000. Since he too has good credit, the bank loans him the money at 6% for 36 months. So his monthly payment comes to $547.50. He drives it 12,000 miles a year and sells it once he’s paid off the loan.
I feel like this represents the vast majority of car buyers. There are many variables, but most people buy a car and drive it until their loan or lease is up then do the same thing again until they can’t drive anymore, usually around age 80.
So given all that information, if you were to follow the same pattern over the average 60 year car buying lifetime, Buyer 1 (new) would spend $223,991. Buyer 2 (lease) would spend $403,440. And Buyer 3 (used) would spend $85,598. (spreadsheet)
That’s a difference of $317,851!!! Which isn’t invested or inflated, just straight up. If you were to calculate the opportunity cost on that it would be millions.
Strictly from a baseline cost perspective, we’ve just established that buying a good used car can save you hundreds of thousands of dollars, but I realize there are some other factors to consider as well. Used vehicles are notorious for undisclosed problems, and cars just need more maintenance as they get older. For many, it’s hard to put a value on the peace of mind that comes with a warranty. And the convenience of not having to sell or trade in a car is certainly attractive when you lease.
Which option is best ultimately comes down to more than just money. So you’ll have to determine how much these non-money factors are worth to you.
General Car Buying Advice
As I learned early in life, depreciation should be a major factor in your car buying research. Reliable, practical car brands hold their value better than brands that are known for having issues. Luxury brands tend to depreciate at a much higher rate and faster as well, so financially they make no sense.
The best recipe I’ve found is to look for someone who is selling a reliable car 1 or 2 years after they bought it, get your use out of it, then sell it right before it hits 100,000 miles. Car values tend to drop off a cliff at that mark.
I hope this information has been valuable to you in deciding what car to buy and how. When writing this article, I asked myself what advice I would give my 16 year old self if I had the chance... Boy I wish I had known this stuff! It would have saved me so much money and trouble.
Ultimately, buying any car is a wonderful, exciting experience. I hope you find the car of your dreams and get an amazing deal!