To Lease or to Purchase a Car Can Be a Complex Decision

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A vehicle backs in to a tight spot in front of the many restaurants along South Alamo Street.

Scott Ball / Rivard Report

Vehicles both old and new park on South Alamo Street on a weekend evening.

Many people have strong opinions about leasing vehicles. Ask any lessee and they will gush about the peace of mind that comes with not owning an expensive, depreciating “asset.” Leased vehicles are almost always under warranty, and the lessee is not on the hook for car repairs and maintenance, save for the occasional oil change.

The “anti-lease” camp, however, claims leasing a vehicle is a waste of money – a car payment with no asset to own or sell at the end of the lease term. And if you’re a lifetime lessee, you will always have a car payment.

The decision to lease or purchase a vehicle can be overwhelming, and there is no easy answer as to what’s the better call. Often, prospective buyers enter a dealership with the expectation that they will be purchasing a vehicle only to be inundated with and captivated by a dealer’s lease pitch.

Ultimately, deciding whether to buy or lease a vehicle is a personal decision that is dependent on a number of factors – not all of them financially related.

A key variable to consider is your driving habits and how long you typically keep your vehicle. Some individuals hate owning a vehicle that has “lost its shine” (or new car smell). The headache of owning an aged vehicle that begins to require recurring maintenance can be a costly burden on both time and budget. Also, with mileage caps on vehicles leases, prospective lessees should consider how many miles they typically drive in a given year. If you are planning several long road trips in your dreamy new wheels, you may not be the ideal candidate for leasing.

Another very important but less understood variable that influences the lease versus purchase decision is the used car price environment. Used car prices directly impact both the lease market and the new car market. Ninety percent of new car purchases include a used car trade-in. The new car purchase options afforded to a prospective buyer are impacted by the trade-in price of the used vehicle.

But what does the used car price environment have to do with the lease market? In a lease, the value of a vehicle can be viewed as sum of two components: the value used during the lease period (in essence, the amount the vehicle’s value depreciates over the life of the lease) and the remaining (or residual) value of the vehicle at the time the lease ends. When used car prices are high, lessors (the dealership) naturally assume higher residual values for the leased vehicle at the expiration of the lease. Higher residual values equate to lower monthly payments over the life of the lease, meaning the dealer assumes the vehicle will not depreciate as much over the life of the lease.

Currently, used car prices are trending toward their multi-year highs, driven by strong resale values of trucks and SUVs, while sedans have shown recent softness in pricing trends. As a result, the consumer has rarely been in a more favorable position to maximize the value of their trade-in.

Since 2009, the average transaction price of a new vehicle is up over 20%, yet the average monthly payment has only increased 5%. How can this be? This is due to higher values for trade-ins, historically low auto financing rates, and extended loan terms (the number of months for the average new vehicle loan term is currently 67 months, over 5.5 years). With 90% of vehicles purchased in the U.S. being financed, these are critical factors for individuals who are looking to make a vehicle purchase.

Also, when deciding between leasing and purchasing a vehicle, consider just how fast the auto industry is changing. The electrification and automation of vehicles could result in a new vehicle purchased today being out of date in just a few years. Moreover, driverless technology will eventually integrate with the rideshare industry which will bring further efficiencies and convenience to utilizing rideshare as a viable substitute to owning or leasing a vehicle of your own.

Historically, lease options were utilized more for higher-priced vehicles, where owners were more prone to frequent model updates and all the “frills in the wheels.” Also, they were willing to pay more for the convenience of services offered in a lease. Personally, I do not think leases are the best financial decision, particularly for economy cars.

In all investments, affordability of the asset (vehicle), maintenance costs (generally higher for luxury sports cars), and interest rate, if financed, are the most important considerations. Don’t let the enticement of a low monthly lease payment lure you in. Also, don’t finance a vehicle for more than three years. I do not think today’s vehicles on the road will have much residual value at all in three years due to the fast pace of development in driverless cars. I know I want a driverless car.

Also, I likely will demand fewer frills in my future wheels. Maybe it’s an age thing, but no option can beat a personal chauffeur, like those provided by the likes of Uber, Lyft, or even my driverless car.

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