Buying a Car: New, Used, Loan or Lease

How to compare buying new or used, paying cash or borrowing, and leasing, so you choose the option that costs least for your needs.

A car is one of the largest purchases many people make. Choosing well can save a great deal of money over the years you own it.

New or used?

New cars lose value quickly, a process called depreciation. A large share of a new car’s value can disappear in the first few years. Buying a car that is a few years old lets someone else absorb that early depreciation. Used cars can carry more risk of repairs, so an inspection and a check of service history are important.

Paying cash or borrowing

Paying cash avoids interest. If you borrow, a car loan spreads the cost but adds interest. Key things to compare:

The interest rate and total interest paid over the loan.
The loan length: longer loans have smaller monthly payments but more total interest, and you may owe more than the car is worth for longer.
Fees and prepayment penalties.

A useful rule is to focus on the total cost, not just the monthly payment. Dealers sometimes stretch loans to make monthly payments look affordable while total costs rise.

Leasing

With a lease, you pay to use a new car for a set period, often two to four years, then return it. Monthly payments can be lower than a loan, but you do not own the car at the end, and there are limits on distance driven and charges for wear. Leasing tends to suit people who want a new car every few years and drive predictable distances.

Comparing two loans

A car costs 800,000 rupees. A three-year loan at 9 percent has higher monthly payments but total interest of roughly 115,000 rupees. A seven-year loan at the same rate has lower monthly payments but total interest of roughly 280,000 rupees. The longer loan feels cheaper each month but costs far more overall.

Remember running costs

The purchase price is only part of the cost. Insurance, fuel, maintenance, parking and registration add up. For people who drive little, using taxis, public transport or occasional rentals may cost less than owning a car at all.

Asking only "can I afford the monthly payment?"

A monthly payment can be made to look affordable by stretching the loan. The better question is the total cost of the car over the time you will own it, including interest, insurance and running costs.

Key takeaways

New cars depreciate quickly; buying slightly used lets someone else absorb that loss.
Compare loans by interest rate, length and total cost, not only monthly payments.
Leasing gives lower payments but no ownership and distance limits.
Running costs are a large part of owning a car.