Car Leasing versus Buy: Pre-owned and Pay with Cash is Best

Last Updated Jun 16, 2010 2:26 PM EDT

I often get questions from readers and sometimes I'll answer them here. If you have questions you'd like to ask, please email me by clicking on the "Contact Ray Martin" link to the left.

Ray, we want to acquire a second car that we will leave at our second home and use primarily on weekends. Our current idea is to acquire a pre-owned Volkswagen Beetle for about $15,000 to $17,000. We would pay cash. The Volkswagen salesman told us it would be best for us to acquire a new Beetle for about $27,000 and lease it on a three-year term with an option to buy, with about a $2,000 upfront for a down payment, acquisition fees, taxes, etc., and a monthly payment of $325. We listened to him patiently but remain convinced that we should buy the pre-owned Beetle since we will use it as a second car. Does our approach sound reasonable? Or is there something magical about leasing a car? Best, Dan

Ray Answers:
Hi Dan and thanks for your great question.

Your approach not only sounds very reasonable for all of the reasons you stated, but it is exactly what I would do in the same situation. Here is how I would look at the numbers:

Buy PRE-OWNED VW Beetle, pay cash:

  • Purchase cost: $16,000
  • Sales tax at 7%: $1,120
  • Total purchase costs: $17,120
Lease NEW VW Beetle:
  • Initial Payment: $2,000
  • Total payments over lease term : $11,700 ($325 x 36)
  • Total lease costs: $13,700
But at the end of the lease term, you will own nothing so you'll have to pay the costs of purchasing another vehicle or leasing again. If you decide to purchase the VW at end of lease, this could cost about $16,000 (in the lease contract this is called the residual price, which could be approximately 60% of the CAP cost). Also, when you buy the car at the end of the lease, you'll have to pay sales tax of about $1,120.

But that's not a fair comparison as the Beetle in the pre-owned scenario would then be six years old. So lets say you turn in the leased Beetle and then buy a six year old version for about $12,150 and pay sales tax of $850. In this comparison the total Lease/Purchase costs would be about $27,000 versus buying a pre-owned VW Beetle of $17,000, or about $10,000 more.

When leasing is compared to buying this new car with cash, the additional cost of leasing is only about $2,000. The difference is even smaller when comparing leasing versus financing with a loan. Check out to compare car lease and finance offers.

Typically you would reduce the leasing costs by an amount that takes into account for the fact that during the lease term you'll have use of the funds that would have been used to purchase the car. But given today's zero interest rate environment, this amounts to peanuts.

When buying a pre-owned vehicle, you should expect to pay more for maintenance, replacing wear items and repairs. But these costs are not likely to come close to the $10,000 difference above.

As you can see in the above scenario leasing costs significantly more than buying a pre-owned vehicle and incrementally more than buying a new one.

The only thing magical about this lease is that the salesman sells a new car and makes a bigger commission. And while there is nothing wrong with that, you need to consider that with leasing the total outlay over the first 36 months will be less but you will own nothing at lease end. You will then have to pay the costs of purchasing or leasing another vehicle.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.