Why Now Is Not The Time To Lease A Car

As we roll into the new year many things have changed. A new President, tighter lending practices, higher unemployment, and a failing auto industry. So what does this all mean if you want to lease a car in today’s market? Simple, you will not see good lease deals and lease payments will start to converge with traditional loan payments.

Here is why. A lease is simply financing the deprecation of a vehicle or in other words you are paying for the decrease in value your car would have during the term of the loan. For example, if you buy a new car for $30,000 and in two years the bank thinks it is worth $20,000, then you are paying for the $10,000 + interest in a lease.

This matters in today’s market because the banks are being flooded with cars that are now worth far less then the banks anticipated the value to be a few years ago. As these low value cars come into the market and the banks can not sell them, they determine the future value of new cars to be based on what they see today. In other words, the banks do not believe a car is going to hold any of its value over a two to five year period.

To see how this matters lets take a second look at a car costing $30,000. In traditional financing your loan payment for five years at 5% interest would be $566, quite a high payment. A few years ago, someone wanting to drive a $30,000 car who could not afford $566 per month payment would lease. A lease with a money factor similar to a 5% interest rate would yield a payment of $358 base on 40% depreciation over three years. Bump that to a 60% depreciation and your payment jumps to $500. Almost as high as the traditional five year loan.

It is not uncommon for the banks to assign 60-70% depreciation rates over three years on today’s cars (especially American models).

The last thing working against you is the banks are not willing to lend making it harder to get good rates.

The car deals may be good, but don’t plan on leasing. To get the best deal in today’s market, you really have to buy the car with traditional financing even if that means you can’t drive the more expensive car.

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