Personal Finance

Buying a used car v leasing – when leasing can make sense (with data)

Guest Post

Buying a car is most likely to be the second largest purchase most people make in their lives.

For most young people, they buy their first car either as a student or early on in their working lives, and there are a lot of potential traps and jargon around that you have to work through.

An increasingly common way of buying cars has become the lease/instalments model, and with many manufacturers and even second-hand car dealers offering interest-free options.

In this article, I argue that buying a used car with cash is no longer sound advice for everyone. I will lay out several of the key challenges with used cars, and then share some of the key financial calculations I make personally when I am faced with a car purchasing decision. I will then share my calculations for my personal use-case and then make some recommendations based on the mileage you cover in your car.

Editorial note from Mohsin and Ibrahim: whilst we don’t necessarily agree with all the conclusions in this article, we’ve put it on the site because the conclusion is based on logical and transparent financial data and the end decision is ultimately a personal one in light of that data. We’ll be following up with a separate article on our personal stance plus a fiqhi analysis of all the car-buying options, but if you care about cars more than we do, we think this approach makes sense.

The links to the spreadsheet are at the end of the article.

Summary

If you are a higher mileage user (travelling 15,000 miles or more per year)buying a 3-year old (approximately) used car is the sensible option.

If you are a lower mileage user (travelling 8,000 miles or fewer per year), going for a lease can make sense if you pick up a great lease deal.

If you are in between (travelling 8,000 – 15,000 miles per year), you should run the numbers based on the factors I discuss below and in the spreadsheet. You can then do a like-for-like comparison and make a personal decision. For example, even if a leased car is £100 more expensive per month, you may decide that you are willing to pay that for the additional comfort/better performance/more prestige of your leased car model.

Let’s delve into why.

Why buying a used car can be a trap

The most common way of buying a car is to buy a used car is with outright cash. Especially for the traditionalists when it comes to finance. Here are some reasons why I believe this can be a trap.

You’re limited by the cash you can put down

In order to buy a car outright you are limited by how much cash you have saved up. You also have to consider the insurance cost as you will have to pay for this annually. I have shopped around and not yet found a monthly insurance payment plans that does not outright charge interest.

Buying a liability (a car is a liability, not an asset) with your saved cash means you can’t do other things with that cash. Sensible things like investing and making a return.

To rub salt into the wounds, your car will be depreciating with every day that goes by and every mile that you drive.

Here is a good calculator to work out the average depreciation of a car.

If you can manage to make more money on your saved cash than you would otherwise save by buying a car instead of leasing, then it’s a financial no brainer. So if you calculate that buying a £10k car saves you £500 per year over a lease, but you realise you could instead invest the £10k and make an 8% yield (£800 return) per year, then it makes sense to lease.

Risk of repairs

Buying a used car is a risk, especially if it is around 10 years old. Modern cars are designed with a life of 150,000 miles or 12 years in mind.

Anything older than this and parts can begin to fail. If a car is poorly maintained or badly driven, then this life can be significantly reduced.

If you have a large amount of cash, you can pay for a good, reliable car. Even if it failed, you would most likely have cash on hand to pay for the repair outright.

The real problem is that when you have limited cash flow, such as if you have just started work, you end up buying a cheaper car which may be very unreliable (aka the oft-cited “Poverty Premium”).

If there is a major fault such as a gearbox issue, you might be stuck with a huge cash bill, which you might then have to pay on credit (a typical clutch replacement costs in the region of £800, gearbox issues can be up to £2,000).

Even not factoring in the risk of a huge payment, older cars will require more maintenance and often have small issues with them every time you go to the mechanic.

While it is quite difficult to factor this in precisely, I have put in a number for this in my calculations.

On the flip side, a lease car will still have its manufacturer warranty in the unlikely event that you face a major problem with it being a brand new car.

It’s a case here of do you risk going with a cheap, old car with an uncertain risk of failure, or do you pay a premium for the certainty of little to no risk of an uncertain big cost? I prefer the latter approach personally.

Fuel

Fuel costs are the single most significant variable cost of owning a car in Europe.

In the Middle East or even the US where fuel costs are much lower, these tend to be much less important. Newer cars have more efficient engines and these have a very significant impact.

Newer diesels are at least twice as clean as their ten-year-old equivalents, and so it makes a lot of sense to buy a new (or almost new) car which is much cleaner. There is also an impact on the environment as your newer car will be much cleaner.

This factor as well is dependent on your mileage, the higher your mileage, the more you will save with a newer car.

As an aside, if you do over 12,000 miles a year, you are likely to save money by driving a diesel rather than a petrol, as diesels are more expensive to buy but more fuel-efficient.

The point is that if you are buying a new-ish car then it will usually be more efficient than buying a significantly older car, even if the older car is cheaper to buy initially.

Insurance is cheaper on newer cars

My intuition was that a newer car would be more expensive to insure, and this is backed up by what other people have told me.

However, when I ran quotes from various websites for older cars and their equivalent new counterparts, I found that the older cars are slightly more expensive to insure.

I have tried this across different brands and vehicle classes, but this is what I have found. It might be something unique with my age or area that I live in which is causing this, but it is definitely worth running a quote on a comparison website such as confused.com or comparethemarket.com to find the cheapest quote you can possibly get.

For me, this works out in favour of buying a newer car. I think the reason insurance companies would charge less for a newer car could be that the statistics show that new car-owners crash less as they are more careful with their cars or something like that.

This will matter more for younger drivers or those living in more central areas as they are the ones likely to have the highest insurance costs.

Car tax costs money when buying – it doesn’t when leasing

In a lease, the cost of car tax is usually covered. If you own your vehicle privately , you will pay tax.

When you are about to buy a car, you should do two things:

  1. If buying a car registered on or after 31 March 2017, take some time to understand the new car tax rules.
  2. Check what you’d be paying in car tax using a website like this one (just opt for the free report).

Conclusion

Ultimately of course, the choice will come down to what cars and deals are available and whether or not having a newer car with all of the perks and technology is important to you.

The point of this article is to make sure that you make the decision with all of the information.

My personal verdict was the following:

For higher mileage users (15,000 miles+), a 3-year-old (approximately) used car is the best option as you still get almost all of the benefits of a brand new car in terms of reliability, fuel economy, tax savings, without having to bear with the high cost of depreciation as after three years the car will already have lost about half of its value.

For lower mileage users (8,000 miles and below), there are some phenomenal deals which are usually only a year or so which are pure lease deals. For example, there was a deal for a 19 plate VW Arteon for only about £160 a month for one year. These have limited mileage on them (usually 5 to 8,000 miles) but even with the excess mileage fees, you don’t end up paying that much. This also means that you have the option to upgrade your car every year, and you are not locked into a longer contract so after a year of enjoying life with a really nice car, you could opt for something else.

If you are in between (travelling 8,000 – 15,000 miles per year), you should run the numbers based on the factors I discuss below and in the spreadsheet. You can then do a like-for-like comparison and make a personal decision. For example, even if a leased car is £100 more expensive per month, you may decide that you are willing to pay that for the additional comfort/better performance/more prestige of your leased car model.

I want a 3-year old used car but I don’t have the cash to put down. What are my options?

There are some useful hacks to buy a decent used car as I advocate, but without putting all the money down.

  1. Buy from a used car dealer and pay on a 0% interest card. MSE have a great 0% credit cards page. You can get cards that are 0% for up 27 months and possibly beyond. You will have to find a dealer that accepts credit cards though for payment (most reputable ones will).
  2. Find a 0% money transfer credit card. This is where instead of buying the car on the credit card, the credit card company transfers the money direct to your bank account at 0% interest rate. You then pay back the amount as you would pay back a normal credit card purchase. This means you could buy your car privately and don’t need someone to accept credit card as the cash would be sat in your bank account. Private sellers tend to be a bit cheaper than used car dealerships so you’d save a bit of money here. See the MSE page for the best 0% money transfers cards.
  3. Use interestfree4cars to buy your used car. I have experience with them and they have been fine to deal with in my experience.
  4. Find a used car dealership that offers 0% finance on used cars themselves. You can usually just google search for this, but the big user car dealers like Stoneacre and JCT600 often provide 0% deals on their used cars.
  5. Ask the dealership. This is something Sheikh Yasir Qadhi advocates (admittedly for new cars – but worth trying on used). I’ve never tried it or heard anyone who has, but definitely worth a go. See minute 17 of this video.
  6. As a side note, NHS employees and certain other employees can get some crazy discounts. So it’s always worth checking if you have any work schemes for cars before you buy or lease.
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3 Comments. Leave new

  • I don’t agree with the insurance comment, I work in insurance and a new car would cost more 9/10 times than a used car for a number for reasons, 1. The value of the new car will be higher in an insurance claim settlement if the vehicle was a total loss against the used older version. 2 parts on newer modesl are not readily available so could be on back order and this will increase claims costs. 3. A used car you have owned for a number of years will provide you with an ownership discount, once you trade this in for the brand new version you lose this discount. 4. Parts on newer cars can be more expensive and repairs more complicated requiring main dealer involvement which adds to the cost.

    One of the factors which could reduce the cost on a new vehicle is if the performance/engine size has reduced this will reduced the vehicle group rating and intern the premium in most cases.

    I hope this helps

    Reply
  • Not sure of the view that a leasing arrangement makes sense over buying with cash. Surely the aim is to help people get out of debt rather than encourage it and that so with one of the biggest rip offs which is car leasing. Suggesting that we should consider investing our cash and get a better rate of return is absolute tosh. That’s like saying we should borrow the amount to invest.

    Reply
    • Thanks for the comment Faizal. Did you read the article in full? The whole premise was the fact that in certain circumstances, a lease is more cost-effective.

      Also, minor point, but leasing isn’t exactly the same as borrowing. I also don’t follow your point about investing and borrowing to invest, I’m not sure I said that?

      Reply

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