Vehicle inventory is down and prices are up, and the only thing worse than buying a car right now is buying a house. Some people look at the auto market the same way as the housing market and think it’s smarter to rent than to buy, just as it may be better to rent a house than to buy right now. However, mathematics does not support this approach.
Cars and houses are more expensive than ever. Some people don’t have the luxury of waiting apart from Marlet change of living situation or vehicle, so that can be a difficult decision as to what to do. Many homebuyers choose to rent because they have effectively been “cut out” of the housing market. Consumers entering the auto market take this “lessee” approach to vehicle purchases believing that leasing is better than buying.
I’ve had hundreds of conversations with car buyers in this tough market who initially thought leasing was their best decision. here are the the most common reasons for leasing and the shortcomings of this approach.
I don’t want to be “locked in” to a car purchase
When you lease a car, you basically pay the depreciation cost over the lease term, which is usually around three years. At the end of the lease, you can either return the car and move on, or buy out the lease and keep your car. Many people think that the lease gives them “flexibility” in their ownership because they will only keep the car for two or three years.
In fact, the opposite is true. When you sign that lease, you’re obligated to all payments, and if you decide you want to leave that lease early, in a normal car market, it’s usually too expensive. So, in essence, you’re locking yourself in for that term. Whereas if you bought a car and decided after a year or two that you wanted to go in a different direction, you can easily sell or trade that car.
At the conclusion of the lease, you have to redo the buying process, however, if you had bought or financed a car after three years if there is nothing on the market that suits your budget, you can simply keep driving what you have until it’s time to replace it.
Payments will be cheaper
Again, in a normal market, lease payments would be considerably cheaper than purchase payments, because you’re only paying for the depreciation of that car over the life of the lease. Additionally, when automakers and dealerships are motivated to sell cars, there are usually factory discounts, rebates, low interest rates (also known as money factor) that help make leasing programs more palpable for someone’s budget versus loans. Currently, many of these incentive programs have disappeared and with 80% of car buyers paying above MSRP for vehicles, this translates into exorbitant lease payments.
I recently received a quote on a Toyota RAV4 LE for a client in NJ who had an MSRP of around $31,000. It was a tax-included, zero-down payment lease for 36 months with 10,000 miles per year and payments were $553 per month. The dealer quoted a financial payment of $560/month for 60 months at 2.49% APR. For just $7 more per month, owning the car is far better than “renting” it.
I don’t wanna roll the dice with resale and trade-in values
Given the fluctuations in the auto market over the past few years, with the value of used cars dropping at the start of the pandemic and then reaching record highs now, buyers are apprehensive about buying something now and unsure of what it will be worth later.
While this is certainly a valid concern and used car prices should return to “normal” levels over the next few years, we are unlikely to see another situation where values fall as they did at the start of the pandemic. When reviewing a lease, you want to look at the total cost of the lease over the term and then compare it to buying that car to resell in the same time frame.
Here is a cost comparison breakdown I provided for a customer in California looking to lease a CX-5 Turbo
CX-5 Turbo 12k mile, $1300 down from $629/month with a residual of $22434 including all fees and taxes.
Total Turbo Purchase Price – $42,305 with all taxes and fees
Total rental cost for Turbo – $23,944 [ ($629 x 36) + $1300 ]
Total turbo price of $42,305 (OTD price) – $22,434 (projected resale price in 3 years) = $19,871
Assuming the bank’s projected resale value of this CX-5 is correct, and that financial institutions are highly motivated to be as specific as possible about it, the lease would cost that person $4,073 more on the same duration as to buy the car and resell it.
The above failures are a constant pattern I see in most cars with most brands when it comes to rentals. I’ve come across a handful of exceptions where the lease versus purchase cost is kind of a washout.
In summary, buyers should re-examine their rental assumptions and even if they have rented before, the likelihood of even duplicating the payments they got previously on the same car is very low. It is essential to look closely at the costs in both directions to see which path is the most advantageous.