If you've ever shopped for a car, you've probably debated how to find the best deal, and how to make sure you're getting the most car for your money. How does the math work out? What's the best use of your money when looking for a vehicle? Is it more cost effective to lease and have a lower monthly payment, buy a new car that will last for many years, or look for something used to avoid the instant depreciation from driving a new car off the lot? I'll dig into each option below with some examples to help explain the best use of your money.
Let's take a look at an example for a 2020 Ford Escape SE 4 wheel drive (4WD). My wife and I have been debating getting a larger vehicle so we can haul more stuff around so that's why I chose an SUV for the example, but the principle is the same across all vehicles. I'll assume a timeline of 6 years for the total cost. That will amount to 2 leases, 5 years of new car payments, and 3 years of used car payments with both the new and used cars depreciating over 6 years. I'll also assume that taxes, fees, and insurance is the same across all three examples, but the lower the vehicle price, the lower those costs will be as well.
First, lets take a look at leasing a car. In essence, leasing a car involves paying a small amount up front in the form of a deposit, lower payments than purchasing a new car, and after 36 months, the car is returned to the dealership. Leases can also include additional costs if you exceed the allowed mileage, or return the car with more damage than the deal deems as "normal wear and tear."
Leasing a car has it's advantages. Leases generally only last 3 years, so at worst you won't be driving a car that's older than 3 years, and almost all repairs should be covered under the manufacturer warranties (although any car less than 3 years old shouldn't have any repairs outside of routine maintenance). The downside to leasing, is that you don't get to keep the car when you're done. You can always work out a deal with the dealership to purchase the car when you're done, but you generally only get credit for the amount the car has decreased in value due to age, and not the payments you've made over the last 3 years.
Looking at an example with the Ford Escape, right now, you can lease a 2020 Ford Escape for $299 a month for 36 months, with $2,879 due at signing. Using 2 leases at this amount for the 6 year time frame the total cost comes out to $27,286.
Buying a new car has many of the same advantages of leasing a car, but you get to keep the car when the payments are done. The downsides are that the payments are usually higher than for a lease, there is generally more money due up front, and the payments last 5 years instead of only 3. If for some reason you can no longer make payments within those 5 years however, you can always sell the car and use that money to pay off the loan. That's an option you don't have when leasing.
Digging into our Ford Escape example for a new car after the savings and cash back offers, a 2020 Ford Escape SE can be purchased for $25,290. Ford is also offering financing with only 0.9% interest for 66 months. Assuming you qualify for that, it works out to a monthly payment of $314 with a 20% down payment ($5,058). After 5 years, you'd have an all-in cost of $25,802, which is just slightly better than the $27,286 needed to lease a car for 6 years, but don't forget, after 6 years of ownership, the 2020 Escape that you own would still be worth around $11,000. So in reality, you would not only pay less buying a new car when compared to leasing, you also would have $11,000 worth of value in your vehicle that's paid off, for an actual difference of $12,484. Just remember that all vehicles that you're going to be driving are depreciating assets, so that $11,000 will continue to decrease over time, but you'll also continue to benefit from the service the car provides for as long as you own it.
Buying a used car is surely the least exciting option. Then again, the most sensible options rarely are. The downsides are obvious, in that the car has a little more wear and tear. It doesn't quite have the same new car smell. It might not have the most up-to-date technology and need a little more maintenance, and it will age faster than a brand new car. The positives are that used cars are drastically cheaper up front, and you have the ability to shop around and find a great deal much easier than buying a new car.
For the used car example, we're going to look at a 3 year old car, so a 2017 Ford Escape SE 4WD with around 50,000 miles. The average person drives around 12,000-15,000 miles each year, but we'll round up to 50,000 to be safe. The Kelly Blue Book fair purchase price for a 2017 Ford Escape SE 4WD is $15,999. Just looking within a 30 mile radius of where I live, I was able to find several models from dealers that were at or below this price all with 20,000-40,000 miles. Assuming a purchase price of $15,999 a 20% down payment ($3,200), and a 3% interest rate the monthly payment over 36 months the monthly payment works out to $372. Banks will usually only give you 36 month loans for used cars. This comes to a total cost of $16,600. After 6 years of depreciation, your Escape would be worth about $8,000. Compared to buying a brand new model, you'd save just over $9,000 and have a car left over that's worth about $3,000 less for a total savings of about $6,000 when buying a used car.
Financially, the lowest cost option is to buy a used car. If it's worth $6,000 to you (or $1,000 a year) to drive a new car, then do it. At worst you'd be driving a 6 year old vehicle. And if you can't fathom being seen in a 6 year old car, you can always lease a new vehicle every 3 years, but it's a luxury you're going to end up paying for. Lastly, remember that everyone has different values and interests. Don't ever tie your self worth to your net worth, or the value of the vehicle that you drive, but if driving a nicer car makes you feel better about yourself than do it. Just don't spend beyond your budget and look to save in other areas that you don't value as strongly.