As many of us graduate over the next two years, and potentially have financial independence for the first time, we will be faced with many important decisions. For a working single adult perhaps the most costly purchase straight out of school will be a vehicle, a necessity for commuting to work and recreation. When it comes to purchasing a vehicle, there are three options: buy new, buy used, and lease.
Unsurprisingly, during the most recent recession new car sales dropped while used car sales picked up, according to the National Auto Dealers Association. Furthermore, the percentage of new car sales that were leases stagnated or even dropped during the peak of the recession. A recent WSJ article advocates that now might be a good time to lease cars. As the recession hit, and more people held onto their cars, new car sales dropped. But the recession’s new cars are today’s used cars. This means that there is less supply of used car than are normally in the economy, and thus their price is higher. Since dealerships factor the post-lease resale value of the car into the monthly payments of the lease, lease prices are lower now than normal, because resale values are higher. In addition, the writer cites evidence that interest rates on car loans are rising, while lease rates are falling.
While conditions for leasing may be more favorable than in previous years, most analysts still insist than buying a car, even a new one, ends up costly less than leasing a car. Although the monthly cost of a lease is generally less than the monthly payment of the loan, the other costs of leasing cars adds up. Leasing doesn’t incur any equity into your car, so at the end of three years, you essentially have nothing more than what you started with. The equity that you put into a car generally makes buying a better investment because the value of the car is worth my than the difference between the lease and loan payments.
We have probably all hear the the claim that a car loses a third of its value as soon as you drive it off the lot. According the Edmunds, the average car loses about 11% as soon as you drive it off the lot, and then 15-25% each year thereafter, depending on the model of the car. One way around that is to not drive the car off the lot, but to buy it second hand. Since the losses are diminishing (car lose less value each year), the older the car you buy, the less real dollars you will lose to depreciation over time. Buying a used car is the cheapest option to own a vehicle, although the costs can vary the most due to more frequent car repairs.
Personally, I cannot see myself every buying a new car. I am more than willing to save five or six thousand dollars to have a car that is a year old. I am not a car person, so I wouldn’t get intrinsic enjoyment value out of owning a new vehicle that some people might get. For some people, having a new car every three years might be worth more than the additional cost, and those people have every right to their own utility calculations. I will happily buy their used vehicles and maximize my utility by saving for something else that I enjoy.