In an age of stagnating wages and rapidly inflating auto prices, leasing a new car can make more sense than ever. Not only can leasing save tremendous amounts of money, it can free the lessee from the risks and responsibilities of ownership. It can also provide an avenue for those with few savings and middling to low credit ratings with a way to enjoy the reliability and confidence that only comes from owning a brand-new car.
Buying a new car can be prohibitively expensive for many
It’s common knowledge that buying a new car is not a great investment, at least not in a vacuum. But if you rely on your car for personal transportation to and from a job, it can still make perfect financial sense to take on the depreciation and insurance costs of a new car. Still, a new car is an extremely costly purchase.
Many people aren’t fully aware of just how sharp the depreciation of new cars is. It has been estimated that the average car in the United States will lose 11 percent of its value, the moment it exits the dealership’s lot. This staggering trend of waning value continues right through the end of the car’s third year, when most vehicles in the U.S. will have lost over half their value. Two decades after leaving the assembly plant, most cars will have become essentially worthless. This is the stark, inescapable reality of car ownership. The best you can hope for is to lose less quickly.
However, leasing shields you from much of the steep costs of depreciation. In effect, this is possible because dealerships are experts at maximizing the value of the car, when it comes time to resell it. They can then pass some of this added value on to the lessee.
Another benefit of not owning the car is that, when the lease is up, you get to simply walk away. You don’t have to spend one additional second of your time or one cent of your money getting rid of the car, so you can get another, other than a few nominal fees that may be charged, depending on your lease agreement.
Leases offer phenomenal savings on the monthly payments versus loan-bought cars
Another reason that leases can be so attractive, especially to those without top credit ratings, is that the savings on the monthly payment can be huge.
For example, a typical $35,000 car bought on a loan will have monthly payments that usually range from $600 to $800, depending on the credit rating and history of the buyer. Contrarily, a lease on exactly the same car may have payments as low as $400. Over the course of a 36-month lease, this can total thousands in savings, allowing the lessee to drive a car that he may not have otherwise been able to afford, while having $200-$400 more discretionary income left over each month.
Leases require far lower up-front costs
But even larger savings can come from reductions in up-front costs. That same $35,000 car may require a down payment of up to $10,000, should the buyer purchase the car using a bank loan. That’s far more cash than most Americans typically have available. Such large up-front costs can make it difficult for average consumers to buy even less expensive models.
However, with a lease, all that’s usually required is a prepayment of the first month’s lease as well as a small security deposit and a few nominal fees. And the security deposit will generally be returned at the end of the lease. This amounts to most leases allowing the lessee to drive off the lot with just a couple hundred dollars in up-front costs, a much more workable amount of money, for most consumers.
It is also worth pointing out that even if someone buying their car on a bank loan is able to maximize the sale price they get for the car when they are done with it, his counterpart who decides to lease will be saving money right now. Economists call this the time value of money, and it’s yet another important reason that leasing may be a better decision, overall, than buying. In short, if you have expenses that you need to address now or investment opportunities, including investing in yourself, that you believe are important, it will be worth far more to save $10,000 now by leasing than to get $10,000, five years later, when you are able to sell your car for that amount. In many cases, it can be much better.
But this aspect of leasing is even better than the above analysis implies. That’s because most individual car owners aren’t that great at selling cars. Leasing avoids these pitfalls and saves the lessee tens of thousands in the process.