I'm not generally a fan of leasing personal vehicles. I'm a buy-and-keep kind of guy. But I get plenty of friends asking about leasing.
If they're doing it to reduce payments, in the past I've usually advised them to buy a cheaper vehicle rather than renting a more expensive one.
But these days, "buying a cheaper vehicle" is much easier said than done.
So, given the state of the car market, is leasing starting to make more sense for the near future?
Fundamentally speaking, leasing hasn't changed. There is a capitalized cost (the price of the car), a residual value (what the lender is assuming the future lease-end value to be), and a money factor (interest rate). Then, if there are incentives from the manufacturer, we have capital cost reductions.
I have a good friend that runs the leasing department of a large credit union. In a nutshell, all of the salient numbers are up, and no auto makers are really offering much in the way of incentives--because they don't need to.
What leasing gives you is that you're given a clean "out" at the end of the lease assuming you stay within the mileage limits of the contract. You may have some equity, but you won't have inequity in the vehicle. In the market now, it's pretty easy to have equity...in the market before Covid, it was pretty easy to have a vehicle that was not worth the lease end value, because manufacturer sponsored leased often had juiced residuals as part of the way to incentivize leasing and get customers in on a trade cycle. The upside of that is that back then is that you could drive a new car every 2 to 4 years (and generally have very little in maintenance in that term) at the same payment or often less of financing a car on 6-7 years, all while not assuming all the risks and long term maintenance to get to the point of equity. In other words, you're generally in and out of a lease car before tires, brakes etc are a concern.
The concept of "owning" a financed vehicle is kind of a fallacy. The bank really owns it until all the payments are made; just miss a couple of payments and that will be very clear. What you own is the obligation to make a monthly payment on something that generally depreciates. Yes, you can make payments to the point where there is equity, but until that point you're assuming all the risks of "ownership".
I think leasing can make sense in any market--it's a matter of finding terms that are agreeable for a vehicle you want to drive.
I would say not yet. The magic on leasing is you are paying the difference between what you can buy the car for, and the future value. Manufacturers predict the future value by using a percentage of MSRP. That works great when you can buy the vehicle for under MSRP because there is already an advantage. It's the opposite when you are paying MSRP (or more). Fake math as an example.
MSRP - $50K
Residual is 55% after 36 months so $27500
You pay $22500 over 36 or 625 a month.
Before the crazy market you could but it for $45k (vs 50) but the residual stays the same since it is based off of MSRP
At that point you are paying $17500 over 36 which is 486 vs 625 for the same vehicle.
This is oversimplified, but should get the idea across
Lease the cheap vehicle. Generally, they are good deals.
alfadriver said:Lease the cheap vehicle. Generally, they are good deals.
Agreed, well said!
For my farm, I lease 3 Tacomas. Dirt cheap leases. End of lease usually I get a nice check from Toyota dealer, making my "out of pocket" even cheaper than the payment was. In Covid, I bought back all my Tacomas from lease, and sold them in open market, and made very nice profit. Leased again 3 more. Of course if you can play the 1 pay lease, and try the lease hacker (I use a dealer in PA and MT to buy), and I sell them all back locally where prices are much higher, you can make the vehicles essentially free (once you factor in some govt mileage usage as well).
The whole "lease is a rent, and purchase is owning" is a fallacy as has been pointed out above.
I'm not sure that "because cheaper than a regular car payment" is that good a reason, which is why I only ever leased one car (the Alfa). Back when I was traveling a lot for work it made more sense as the travel reimbursements in most months covered more than the lease payment and I ended up with a dependable car with a warranty. Of course then Covid hit and the math went out the window.
I don't think it's a good time to lease now - the residuals are likely based on "normal" calculations, which means lower residuals and thus higher lease payments. It might be worth looking for a manufacturer subsidized lease like the typical "lease X for only $199/month" on the manufacturer's website, but I don't think they're very prevalent right now as it's not like the manufacturers have any issue shifting vehicles atm.
IMHO, no. Leasing a new car has never really been a good idea in the general case and nothing about covid has changed that. The only way it ends up cheaper than a purchase is if the car winds up being worth a bunch less than the residual, and you really don't know that at purchase time. So basically you're gambling, and you're doing it against a company who has a lot more expertise in this area than you do.
That said, there are limited cases where it may make sense. Sometimes leasing a business vehicle is advantageous for accounting and tax reasons. It may also make sense if you know for certain that you're going to get rid of a vehicle at the end of the lease term and want the prenegotiated "out" clause rather than dealing with selling it at that point. This kind of made sense on the early adopter EVs where the tech was in its infancy and there were unknowns regarding battery life/etc.
And yeah, occasionally there are screaming deals on a lease that aren't available on a purchase when the manufacturer needs to move the inventory.
I know one guy who liked to keep cars for very short periods -- weeks or months before he got bored and wanted something new. Leasing made sense for him because he didn't have to pay sales tax on the whole purchase price, just on the lease payments that he actually made. At the time most leases allowed for fairly easy transfers so this was possible, but apparently that's not true any more and it's much harder to get rid of a vehicle before the lease expires.
I've been watching ads for leased vehicles lately and I think I'm seeing more shorter leases with higher up front payments. 24 months and $3800-$4900 up front. I'm a buy it and hold proponent, never made a car loan payment, so I look at those kinds of numbers and go "Nope". I just can't see spending $8K every couple of years for a new car or truck, but my latest purchase was$36K for my GMC so that covers 10 years of leasing.
In reply to mr2s2000elise :
Just don't try to lease from a dealer in Nebraska right?
I know how leases work. I get that a financed vehicle isn't technically "owned" until it's paid off, but once that same 36-48 month period is over, you own the vehicle with no further purchase. A lease with buyout is more like a house mortgage with a balloon payment - you're gambling a lower payment now against predicted future value. And yes, I also get that you can just turn the car in, which you can't do with a balloon mortgage.
Leasing comes down to the math, and I was just wondering if the math was at the point that they made more general sense yet rather than very specific cases. Seems like it's not.
Thanks for everybody's input.
In reply to Duke :
That "just turn the car in" factor can make a big difference in whether it's worth it. If you're likely to buy out the lease or keep the purchased car long term, the lease is less likely to make sense. But if you're only planning to keep the car for 3 years regardless, leasing is more likely to be viable.
Math and being honest with yourself. If you don't intend to keep a car very long before replacing it, the math for leasing works out. If you really want the car at the end, forever, it doesn't.
Plus it used to be the cost of a lease was fully deductible ( virtually unquestioned by the IRS) but a purchase used for business had to go through some calculations in order to be fully deductible.
Since I can no longer claim business use I don't know what the tax ramifications are anymore.
FSP_ZX2 said:Fundamentally speaking, leasing hasn't changed. There is a capitalized cost (the price of the car), a residual value (what the lender is assuming the future lease-end value to be), and a money factor (interest rate). Then, if there are incentives from the manufacturer, we have capital cost reductions.
I have a good friend that runs the leasing department of a large credit union. In a nutshell, all of the salient numbers are up, and no auto makers are really offering much in the way of incentives--because they don't need to.
What leasing gives you is that you're given a clean "out" at the end of the lease assuming you stay within the mileage limits of the contract. You may have some equity, but you won't have inequity in the vehicle. In the market now, it's pretty easy to have equity...in the market before Covid, it was pretty easy to have a vehicle that was not worth the lease end value, because manufacturer sponsored leased often had juiced residuals as part of the way to incentivize leasing and get customers in on a trade cycle. The upside of that is that back then is that you could drive a new car every 2 to 4 years (and generally have very little in maintenance in that term) at the same payment or often less of financing a car on 6-7 years, all while not assuming all the risks and long term maintenance to get to the point of equity. In other words, you're generally in and out of a lease car before tires, brakes etc are a concern.
The concept of "owning" a financed vehicle is kind of a fallacy. The bank really owns it until all the payments are made; just miss a couple of payments and that will be very clear. What you own is the obligation to make a monthly payment on something that generally depreciates. Yes, you can make payments to the point where there is equity, but until that point you're assuming all the risks of "ownership".
I think leasing can make sense in any market--it's a matter of finding terms that are agreeable for a vehicle you want to drive.
^^As a guy with 22 years experience in dealing with auto leasing, i consider this to be an excellent explanation.
Leases are neither inherently good nor bad. Right now lease payments are lower than purchase payments, but are far higher than they were for a comparable vehicle 3 or 4 years back.
Said another way, currently leasing isn't nearly as attractive but some people still do it as it yields a lower payment than a buy.
If you're looking to lease a new Camry for $239/mo with little out of pocket...well those days are long gone!
Leasing is something a company does when they don't wish to acquire.
Finance wants a flat rate to write off.
There is no profit or gain on this end of a lease, it is all a write off.
It's for perks, some take it to flexing.
It's a financially clean way for a corp to provide vehicles for staff.
It's flat rate cars for corporate america. (TAX WRITE OFF)
Anyone thinks they are saving money, has blinders on.
It's like 50% off of a 100% markup, do the MATH......
You (Might) have lower payments but you get nothing but a tax write off in the end. It's hard to drive a tax write off......
People that like leases are the same people who play lotto.
You are paying for the car they are renting you, and when its paid off you don't get to keep the car.
Leases are for corps that do not want to acquire property, a 2 or 3 year old vehicle is a liability, 4 certainly.
Corps want fixed costs and easy cleanup.
In reply to bentwrench :
You should lease things that depreciate. You should buy things that appreciate.
Traditionally cars are bad investments. They almost always depreciate, sometimes very quickly (not taking the crazy Covid economy of the last 2 years). There three things and only three things that matter when it comes to automobile depreciation: age, mileage and condition. After the first few years , mileage and condition matter more than age. But at the end of the day, if you're using a car as transportation, it's probably depreciating with each mile used--and it does not matter how the car is paid for.
Most people finance their new cars--I think that is a fair assumption. The average driver drives 15k year--also a fair assumption. When people do "traditional" financing they generally run the loans out 72-84 months nowadays. That means in 6 to 7 years the average car has 90,000 to 105,000 miles on it. Many people do NOT keep their cars that long--they trade them before they are fully paid for. That means they always have a payment. It also means that somewhere in the 2nd half of the span above, there will be some maintenance costs like tires, brakes and maybe even shocks, alignment etc. Those costs need to be accounted for the the true cost of ownership--it makes the monthly "payment" even more than just the bank note. It also means that many cars drive out of warranty after 36-50K miles. Now the owner is assuming more risk if something breaks on the car.
If you can lease a car for the same payment, or often less, and be in and out of it all while having warranty coverage and staying with the latest-and-greatest tech...why is that stupid? There is a cost to driving any and every car. And like I said above--it's all about who you want to assume the risks associated with that.
Leasing can be the cheapest way to constantly own a new car and that's about it. Right now, it's not a really good market to lease. Residual rates are not that high (considering the market right now), money factors are high (basically, interest/APR), and there are not many incentives (lease cash, etc). I actually think if you have the desire/want, just find a new car you want at MSRP and that's your best shot for now. Used cars are horrible right now and CPO cars (which are basically used cars with warranties) are horrible.
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