The problem: new cars aren't always worth what you pay for them

You've just brought your new car from the salesroom. It's great. It's shiny, it simply oozes class and most importantly it has that new car smell. But as you drive off the forecourt, you've just thrown away $5,598.61 of your hard earned money. Annoying? Yes!

New cars are great, they are cheaper to run, they break down less, they look good and are very important when you're meeting that new client or even if you just want to show off to your friends and family. They are however a substantial purchase that loses you money from the beginning.

Although it can vary between models, losing out to depreciation is inescapable if you buy new and starts from the moment your 'new car' turns into a 'used car' as you drive off the sales forecourt. Typically a new car loses 25% of its value even as soon as it is driven home from the salesroom, so on an average car purchase*, the buyer instantly loses $5,598.61. The car will continue to lose value at a frightening pace, until three years in, when the value begins to start dropping at around 6% per year. On average over the initial three years after purchase, a new car will lose around 50% of its value although some cars can lose a whopping 75%.

What can I do?
It boils down to three options: buy a used car: lease a new car: or walk!

If a new car is what you really want, leasing is becoming the chosen option for many people who are unwilling to lose money to depreciation.

Car leasing companies charge you a fixed monthly price based upon what they think the car you borrow will be worth at the end of your contract. Their customers only pay for the depreciation on a car. Over the lease period this can allow you to drive a new car without losing a significant amount of money through depreciation.

The maths

A new car

(For a 'typical car*' the Ford Focus has been chosen as a good mid-range option at $24,265.16, 5.9% APR is Ford's typical rate [www.ford.co.uk])

Purchase price = $24,265.16
Loan cost + purchase price = $25,696.80 (5.9% APR over 36 months)
50% depreciation over 3 years = $12132.58
Resell value = $12132.58
Total cost over 3 years = $13,564.22

Leasing

(Pricing from Flexxilease.co.uk)

First month payment: $1,304.67
Monthly payment x 36 (New car every 12 months): $416.66 x36 = $14,999.76

Total cost: $16,304.43

Which is better: leasing or buying?

Like everything, it depends on your circumstances and what you want from a car.
Over the first three years of ownership leasing can save you '5309.66. Over the longer term if you keep your car for more than five years it is cheaper to buy, but you have to take into account that you will be driving a five year old carwith a lease contract you can get a new car every 12 months.

Advantages of buying a new car vs. leasing

Leasing
' Significant savings in the first 0-4 years

' Frequently replaced and updated car

' Few or no repair costs

' Breakdown cover is normally included

' No money tied up in a loss making asset

Buying new

' Low repair costs initially

' Good if you are going to have the same car for over 5 years

' Can choose a car to your exact specification

' Savings can be made on the cost if you have a lump sum of money

' You own the car