Photo: Greentellect Studio (Shutterstock)
It’s a bad time to buy a new car—if you can even find the vehicle you want, you’ll probably be paying above sticker price to get it. But it’s a very bad time to lease a new auto. According to Tyson Jominy, vice president of data and analytics at J.D. Power, it is, in fact, a “staggeringly poor time to be leasing,” and it’s likely to continue to be that way for the foreseeable future.
Shrinking incentives for new car leases
Lower monthly payments for leased cars used to be the one of the main selling points for those weighing leasing versus buying, but that math has been changing. Back when computer chips were readily available, car leasing companies offered substantial incentives to customers, but with the drop in fleet supply caused by global supply chain issues, such incentives are shrinking rapidly. According to J.D. Power, the average leasing company now offers around $1,500 in incentives, down from around $4,000 in pre-pandemic times. But a higher total cost isn’t the only reason you shouldn’t lease right now.
Fewer miles for your money
Along with offering lower incentives, car leasing companies are cutting back on the number of miles customers can drive without incurring penalties. The industry standard a few years ago was 12,000 miles per year, but now many leases are offering only 10,000. If you go over your limit, even if only to the previous mile maximum, you’ll probably be charged around 30 cents a mile, adding 600 bucks to the price of a lease that was likely already more expensive than it would have been a few years back.
Depreciation and you
The current shortage of buyable cars has caused the value of used cars to skyrocket—the price of an American-made car from the last five years is around 30% higher than it was a year ago. You’d think less depreciation would result in cheaper lease payments, but leasing companies aren’t lowering rates, and with an across-the-board shortage of cars, they don’t have a lot of incentive to start.
Here’s exactly how bad an idea it is to lease versus buy a new car this year
This video from Ari Janessian, an auto broker with Negotiation Guides, breaks down the numbers for leasing versus buying a 2022 Toyota RAV 4, and once you see it in black and white, it becomes clear just how “staggeringly bad” leasing has become.
The MSRP of the RAV 4 is $35,000, plus fees and taxes. If you financed at Toyota’s 2.49% interest (the incentive Toyota is offering right now) and only put down taxes and fees, you’d have a monthly payment of $621, resulting in a total cost of $37,260 (plus taxes and fees). In five years, the RAV 4 is expected to be worth about $21,000 (assuming a deprecation of 40%) on the open market, so the total cost of ownership for that time span would be around $16,260.
If you were to instead lease a RAV 4 for 36 months, and again put down only the taxes and fees, you’d be paying $471 a month (assuming 4.68 APR). In only three years, your leased RAV 4 would cost you $16,956 (plus taxes and fees), at which point you’d have to return it or buy out the lease.
In both cases, for an outlay of around $16,000, you can either drive a car for five years if you finance it, or three years if you lease. “You got two extra years here,” explains Janessian. “Terrible, terrible idea to lease a car right now.”
Different cars have different resale values, of course, and finance rates and incentives vary as well, so these numbers won’t apply across the board, but the trend is clear.
If only you had a time machine
If you happen to have leased a car in 2019, congratulations! You made a very good decision. But make sure you don’t just turn in your car at the end of your lease—the average value of a 2019 vehicle is $7,208 more than its projected residual value, so if you buy your car when your lease is up, it’ll be a steal. The price difference is so great, some people are even selling their leases for a profit.
How long will this go on?
There’s no telling how long the shortage of cars will last. While the computer chip shortage is starting to ease and automobile stocks are gradually filling out, a backlog of consumer demand will likely keep cars scarce on the lots until the end of 2022, according to industry analysts.
