Leasing vehicles became very popular in the early 2000s when dealers developed leasing as a mechanism for making money. Leased vehicles allow drivers to enjoy all of the benefits of driving a brand-new auto at the same or lower rate than a loan would cost in monthly payments. They also boosted visibility for the dealerships, acting as rolling advertisements for the brand and getting more of the vehicles out on the roads.
If you’re considering your options, try to tune out the immediate gratification of driving away with a shiny new car on lease and pay attention to what best suits your pocketbook.
The average cost of a new car is about $35,000, which can be an insurmountable figure for people to consider. Leasing makes it possible for those with little savings to drive away with a brand-new car, but they have to start over every two or three years. The unique market conditions of 2020 are putting a new spin on the lease or buy options as well, resulting in prime buyer’s market conditions.
How Does Leasing a Car Work
Leasing has allowed American auto manufacturers to regain strength in the market. Ten years ago Japanese manufactured vehicles dominated the leased vehicle market with 58 percent, and German-made vehicles had 24 percent of the market. By 2016, American automakers had reconfigured their strategy on leasing to move up to 52 percent of the market, dealing a blow to Japanese manufacturers who had shrunk to 37 percent and to German vehicles which only made up 11 percent.
Leased vehicles have a specific term, generally for three years and 36,000 miles. The driver makes payments just as they would on a new car loan, but a leased vehicle does not belong to the driver (lessee) when the lease period is over. At the end of the lease period the lessee may purchase the vehicle for an additional amount, called the residual value. In addition, leasing provides:
- No loss of investment from depreciation;
- Tax benefit for business use;
- No sales tax owed, and
- Warranty coverage of repairs.
Critics of auto leasing say there are hidden costs to lease arrangements, including:
- Charges for excessive mileage;
- Security deposit required;
- Charges for wear and tear;
- No equity;
- No savings when mileage is below the projected figure;
- The end-of-lease buyout price is rarely a discount or deal;
- Higher insurance premiums, and
- Fees for ending the lease early.
Experts say that a decent deal on a leased vehicle should:
- Not cost more than 10 percent of your take-home pay;
- Monthly lease payments should not exceed one percent of the vehicle’s retail price, and
- Take into account the options and extras on the vehicle.
What To Look For When Buying a Car
Saving money for a down payment is just the first out-of-pocket expense when buying a car. Taxes, title, and licensing must be paid before you can drive away – and there’s insurance too.
But at the end of the day, do the benefits outweigh the risks?
- You may sell the vehicle at any time and get something else (even step down to a cheaper model while pocketing some money);
- At the end of your payment period you have equity – a vehicle that’s worth money;
- A vehicle is an asset and completing loan payments improves your credit rating;
- You may modify your vehicle if you choose;
- You may pay the vehicle loan off early to save money;
- You can keep the vehicle as long as you want.
Buying vs Leasing a Car
Experts say that those opting to lease vehicles rarely attempt to negotiate the best off-lease price for the vehicle at the end of the lease term. Dealers usually base the lease on MSRP rather than the dealership cost, which is the wholesale price. Beware of the buyout deals that you may be offered – do the math to ensure the price you’re offered is based on the wholesale price of the vehicle as you’re saving the lease holder the costs associated with reselling the vehicle, which may include long-distance shipping.
The market for automobiles has been volatile in recent years, with a glut of off-lease vehicles flooding the used car market and the pandemic generally depressing the market. Such conditions are great for those shopping for new or used vehicles but tough for dealers under pressure to move inventory.
