Is car leasing dead? – Nerd Wallet
Leasing a car used to be a popular and flexible way to finance a new vehicle. But rising car prices, low inventories and rising interest rates forced the practice to take a dive.
“Lease deals are terrible, so consumers aren’t choosing to lease,” says Jonathan Smoke, chief economist at Cox Automotive.
No less than 30% of new cars were leased in 2019; that figure fell to 19% in September, according to data from Cox. The pandemic has slowed leasing, but it’s really the inventory shortages, starting in May 2021, that’s dragged it down, Smoke says.
Average monthly lease payments in August reached $581, up $120 from two years earlier, according to Ivan Drury, chief information officer for automotive research site Edmunds. Compare that with the average 70-month car loan payment, which hit $707 a month, up $150 from two years ago.
But leasing is not really dead. Some of the benefits that consumers have enjoyed about leasing remain. And experts believe that good offers could return as soon as the end of the year.
Where have all the “rental specials” gone?
In the past, manufacturers wishing to move metal frequently offered “rental specials” – attractive monthly payments made possible by manipulating the rental formula. Their captive lenders—banks set up by automakers that fund most leases—lowered interest rates or increased the projected value of the car, known as “residual value.”
“Serial renters,” those who rent rather than buy, remember their monthly payments, Smoke says. When they see the currently high lease payments, they often choose to purchase the vehicle they are leasing.
Some leasing interest rates are now “over the moon,” says Oren Weintraub, president of Authority Auto car buying concierge service in Tarzana, Calif. Recently, he saw a manufacturer charge 8% interest, known as the “monetary factor,” for a lease payment. But he tells his clients that renting is always worth considering.
Why some car buyers are still leasing
The factors that drew people to rentals in the past are still beneficial, says Scot Hall, executive vice president of operations at Swapalease.com. For example, he says, leasing offers:
Less down payment and less monthly payments. Rents have increased but remain below financing a car. For the nation’s most popular vehicle, the Ford F-150, the average loan payment was $832 in the second quarter of 2022, according to Experian Automotive. The average lease payment for the same vehicle was $516.
Future price locked. Your purchase price, if you decide to buy the vehicle at the end of the lease, is fixed in your lease agreement as the residual value. If the car goes up in value – which is happening now – you can buy the car at a bargain price. Or you can return the car and drive away.
Shorter commitment. Leasing is an easy way to get cars in and out so you can drive the latest and greatest models frequently.
Less sales tax. In a lease, you generally only pay sales tax on the total lease payments, not on the purchase price of the vehicle.
Protection against loss. If your car is damaged in an accident and then repaired, it will be worth less when resold. If you’re renting, that’s not your problem — the leasing company will pick up the slack.
Warranty and reduced maintenance. New cars come with a bumper-to-bumper warranty of at least 36 months – no need to buy extended coverage. And some leases come with free maintenance.
The latest technology, risk free. Weintraub and Hall cite the rapid evolution of technology and security features and electric vehicle batteries as reasons to rent.
“Technology is changing so fast that I’m practically forcing my customers to rent if they want to get an electric vehicle,” says Weintraub.
Conversely, Hall says some consumers are wary of new technologies, and leasing offers a relatively cautious path to adoption. For example, the vast majority of electric vehicles were leased until recently because consumer fears about battery life meant they didn’t necessarily want to own one long-term.
If you are considering a lease
To see what form of financing makes sense, it’s a good idea to do a simple cost comparison of lease-purchase versus purchase bluntly, Weintraub said. Here’s how to see what fits best:
Total cost of a lease: Add the cost of the down payment (sometimes referred to as a “leaving fee”) to the total cost of all monthly lease payments. Then add to that the cost of buying the car later at the residual value.
Total purchase cost: This is the down payment plus the total of all monthly payments. If you repay the loan early, you reduce the amount spent on interest.
In many cases, there can be a small financial difference between leasing and buying the car later and buying the car outright. If this happens, Weintraub recommends leasing because when the car market stabilizes, you may be able to buy the same car for a cheaper price.
Recent lease changes to watch out for
Beware of restrictions. Many car manufacturers no longer allow a third party – usually a car dealer taking a trade-in – to purchase the vehicle at the end of the lease. Tesla goes further, without a buyout option at the end of the contract.
Your mileage may vary. Some leases now include 10,000 miles per year instead of the traditional 12,000 miles. Although this reduces the payment, you could end up with a mileage penalty when you return the vehicle.
Be smart about redemption. If your lease is ending soon, the residual value is probably a bargain. Consider buy out your lease for yourself or a member of your family so as not to lose your capital.