Car leasing vs buying new vs buying second hand

Car leasing vs buying new vs buying second hand

21 December 2019 Concept Car

Choice is supposed to be a good thing. And yet, when it comes to buying a car, too much choice can easily get confusing. On top of having to decide which brand and model to select, you will also need to take a look at how to finance your purchase and which accessories and extras to get. And then there is also the question of whether to buy a new or second hand car or whether to opt for a leasing plan instead.

No wonder many potential buyers rather hold on to their old vehicle just a little longer!

And yet, things aren’t really all that complicated. With our guide to buying new, buying used or leasing, you should be able to arrive at a sensible conclusion pretty quickly. Which means that, in the end, you’re left with the more agreeable part of the process: Looking for potentially interesting vehicles and taking them for a test drive.

To get started, let’s take a deeper look at what to do if you’d rather not buy a car.

Table of Contents

What are the most important benefits & problems of leasing?

When it comes to financing, leasing has sometimes been described as the best of both worlds: You get to drive a different, spanking new car every three years, enjoy the benefit of the latest technologies and, of course, feel that great sensation of driving a factory new vehicle. On top of that, your monthly lease is usually comparatively low, making it an attractive option if your financial capacities are limited.

So why is leasing not always best?

To understand the intricacies of leasing a car, we need to take a look at how it works on a financial level. When you’re signing a leasing contract, you are essentially renting the car for a limited amount of time. Although most contracts will allow you to buy the model at the end of the lease period, this is not necessarily the way it works out. Instead, you usually return the car to your dealer and then start a new leasing deal for a different model. Or, to put it more bluntly: you never actually own the vehicle.

Why is not owning the vehicle a problem?

On the bright side, since you’re typically leasing a car for its first three years, it is always under warranty, so the only costs incurred are maintenance costs.

Unfortunately, this does not mean you can be careless. Any wear and tear caused during use will be added to your bill at the end of the lease. This can become costly.

For the same reason, you will usually be obligated to restrict yourself to a predefined mileage limit. If you exceed it, every additional mile will cost you – sometimes severely. Added costs of up to 20 cents per mile are not rarity and this can quickly add up.

You can also not make any major alterations to the car, even if they may seem to add value on paper. And if you do go ahead and add some extras, you may have to return the car to the state it was in before you signed the contract.

At the end of the leasing period, you do not own the car and can not resell it yourself. This need not be an issue per se, but it does make leasing a lot more expensive than the other options at your disposal.

So why not just buy a new car?

Buying new is an extremely alluring proposition. In an interesting, albeit flawed article for his blog, Ramit Sethi has made a case for buying a new rather than a used car.

From his point of view, there are quite a few arguments in favour of making a bigger initial investment and buying new versus buying used:

  • New cars are more reliable than used cars. This is not only a benefit in terms of costs, but increased reliability also means less hassle and less potential worries about ending up stranded in the middle of nowhere because your car broke down.
  • Interest rates for new cars can be lower than for used cars.
  • The difference in terms of costs between buying new and second hand are not as high as many may claim (we tend to disagree, as we’ll demonstrate further down this article).

All in all, the argument mainly rests on the notion that new cars simply feel better and that, on a long enough time line, the higher costs will eventually level out.

There is certainly some justification to why buying new can be tempting.

There is certainly some justification to why buying new can be tempting. - Concept Car Credit
As with leasing, you get the latest technology, including up to date gadgets and the most fuel efficient motors available on the market at this moment. Newer cars are also generally more ecologically friendly than used ones, which can be an important argument for some.

However, technologies aren’t always perfect straight away. This means that, as a first buyer, you bear all the risk of a new model, whereas used buyers can wait until the manufacturer makes improvements.

It is also worth pointing out that all cars have become significantly more reliable, including used ones. Safely driving a car for 15 years or well above 100,000 miles is no longer a record breaking achievement. Quite on the contrary, it seems perfectly natural. Which means that the argument in favour of new always being the costlier, but safer choice is crumbling.

Clearly, it is time to re-evaluate used cars

Potential customers setting foot into our showroom are stunned at how great our models look. Still today, the assumption seems to be that used cars will somehow look worn out, have multiple defects.

In reality, most used cars are hard to distinguish from those rolling off the conveyor belt at the factory.

This is the main reason why used cars have become by far the most popular choice for consumers in the UK and why the second hand market has overtaken the one for new cars in a storm. As money saving website Nerdwallet puts it:

“Cars have never been more dependable than they are today. (…) All cars require regular maintenance such as oil changes, tire rotation, brake jobs. But you can drive today’s cars much farther in between these scheduled maintenance visits. Even tires and brake pads last much longer than before.”

Another benefit of buying a used car at the right time is that you will usually be able to sell it off again at almost the exact same price a few years later, provided you keep it in great shape.

We’ve established the pros and cons of leasing, buying new and buying used. So now it’s time to compare their merits in the financial department.

But first, let’s bust two important myths

The perhaps most frequently repeated myth about the benefits of buying new is that it can make sense if you plan to drive your car into the ground (or just for a very long time). The idea behind this reasoning is that by using your vehicle for more than ten years, you stay clear of the loss-inducing early years, when car depreciation is highest. After the ten year mark, the car no longer loses value and you may even be able to sell it off at a reasonable price.

Financial expert Karen Greutman convincingly argues against this often repeated mantra. Using the example of a $25,000 car, which loses $8,000 n value over its first two years, she writes:

“Something happens with compound depreciation – as a car ages past 10 years, a difference of 2 or 3 years in age doesn’t mean much in terms of value. This makes sense when you think about it… what is the difference in value of a 12 year old car and a 14 year old car? All things being equal, not that much; they are both only worth a few thousand dollars. At this point in the life cycle of a vehicle, the things that determine it’s value are miles, condition, how well it has been maintained, etc. So here is my question: If you plan to keep a car for 10+ years, why would you spend the additional $8,000?”

Another myth is the claim that insurance costs are lower for new cars compared to used ones.

In reality, as moneycrashers have demonstrated, the case is anything but clear. New cars may have more up to date anti-theft-technology and safety features. But they are also of a higher value and therefore more costly in terms of a repair. Which simply means that everything depends on the concrete car and contract you’re looking at.

Financial realities: Buying new vs buying used vs leasing

Financial realities: Buying new vs buying used vs leasing - Concept Car Credit
As used cars and leasing have become ever more popular, some commentators feel the need to rush to the defence of new models. Writing for money advice website The Simple Dollar, Jon Gorey argues that new does not have to be more expensive than used. In his example, he owned several (very) old cars that cost him twice the purchasing price in repairs and gave him a lot of trouble.

These examples are clearly in the minority today. It may be true that deals for new cars can be unbelievably good. But the verdict on buying new versus buying used versus leasing is clear, as edmunds.com has shown.

In their example, in terms of out of pocket costs, a new car is clearly most expensive, followed by leasing and used cars as the winner. If you intend to re-sell the vehicle after six years, the situation changes slightly. After all, the resale value makes buying new a more attractive proposition than leasing.

But buying used always remains the financially most interesting alternative.

The Balance even goes as far as to say:

“Financially it does not make a lot of sense to buy a new car unless you have money you do not mind losing.”

There are some other factors to consider as well, however, as Lifehacker has correctly pointed out. Used cars are always your thriftiest option. But there may nonetheless be arguments as to why a different option may be better for you:

  • Every way of buying or leasing a car has different effects on your cash flow. The leasing rate is lower than your loan payments, for example. So if you can only afford to spend a very small monthly sum, then leasing may be your best choice, even though it will end up being more expensive in the end.
  • Leasing contracts will usually specify only a small down payment. Again, this may be a benefit for anyone wishing to keep costs down to an absolute minimum.
  • If you drive a lot, buying is always your best bet, since, as we mentioned before, any mile you drive beyond the limits defined in your leasing agreement, will cost you.
  • If you intend to own the car for a long time, buying is better. Leasing makes sense if you place great importance on always having the latest cars with the newest technology.

At Concept Car Credit, we aim at providing you with the best possible choices.

Our cars are second hand, but feel as new. And the financing is as flexible as leasing, but you are still the owner.

If you want to know more, simply visit our digital showroom or get in touch with us using our contact form. Or drop by our Manchester showroom – we’re already looking forward to your visit!

21 December 2019 Concept Car