WHY LEASING WORKS
Leasing continues to be one of the most misunderstood ways to get into a new vehicle. That’s unfortunate because in reality, most financial experts would tell you that you should be leasing your vehicle over owning it.
You never own a depreciating asset, is how the saying goes. And a vehicle is definitely a depreciating asset. Generally speaking, the first year of ownership sees the largest drop in value.
If you are financing, or have bought the vehicle, you are one the absorbing that loss. And every year that goes by, the vehicle continues to lose value.
This is one of the larger myths of car ownership. One of the main counter arguments to leasing is that the consumer wants to have an asset when it comes time to trade-in. Or, they perceive some value in ownership that leasing can’t provide them.
Let’s look at these…
If you purchase a $50,000 vehicle and finance it for 5 years, at the end of those five years, you have paid, well… $50,000.
Vehicle values after five years vary from manufacturer to manufacturer, but for the sake of this calculation, let’s assume your vehicle comes in at a fairly standard industry average of retaining 25-30% of its original value (we’ll use 27% as the calculation).
That means your $50,000 ‘asset’ is now worth $13,500. So, in 5 years you invested $50,000 and lost $36,500. Would you be happy if your financial advisor made that return for you?
But doesn’t the value of ownership kick in and you get to utilize that $13,500 as a trade-in? Yes, however, to better understand how that’s not an effective financial strategy, let’s look at the benefit of the lease.
In the above example you’ve paid $50,000 for 5 years. If you were leasing that same vehicle over those same five years, you would have paid $36,500.
You would have saved $13,500. But the question usually asked is what’s the difference? At the end of the five years you’ve either saved $13,500 or you’ve got $13,500 as an asset to trade-in.
That’s true, but there are a few key differences:
1. A $50,000 loan paid off over 5 years = $833.33/month payment
2. A $36,500 lease obligation paid over 5 years = $608.33/month payment
3. The value of the vehicle after 5 years is locked in on a lease; so if it drops you aren’t impacted but if it drops on your ownership, you have to accept the lower value
That’s over a $200/month payment difference. I think we all could benefit from having an extra $200 per month in our bank account. Generally speaking, the lease payment is cheaper. It is simple math: you’re paying for less of the total vehicle value than if you finance/buy it.
Another major consideration is the fact that if you’re talking about the trade-in value of your vehicle, you most likely want a new vehicle. Ownership is a harder exit strategy.
Ignore the fact the value could drop; the biggest obstacle we are coming across now in the industry is people in finance terms that are 6, 7 or 8 years long. In a lot of cases, the value of the vehicle is less than the value of the vehicle.
That means in order to trade-in the vehicle you will have to pay off the remaining loan balance, or, as most often happens, you roll that into the new loan on your new vehicle. So now your $50,000 new vehicle may have $10,000 of loan from your old vehicle in it. That eventually becomes unsustainable and you’ll need to see out the full term of a finance and watch all those new vehicles pass you by.
However, the lease comes with a built-in exit strategy. After the term of the lease you have two easy options: buy out the vehicle at the pre-determined remaining amount or; hand the keys back and pick a new vehicle!
If you’re super good with your money, you’ll take that $13,500 you saved and either have invested it in something new, or saved it for a down-payment.
There are a few instances where a lease may not be the best choice. If you know for a fact you’re going to drive in excess of 24,000km a year then a lease may not be for you. Or, if you’re a person who actually drives their vehicle for over 10 years, then perhaps a lease may not be for you.
Cars have become commodities. We are used to car payments. We trade in on a cycle of 3-5 years. Leasing just makes a lot of sense for most people. It’s a shame people are still scared of it.
It’s ok to not understand it. We’re here to help. We’ve got a showroom full of experts who would be happy to help you understand it better and see if it would be a good fit for you (hint: it probably would be!).
Thanks for reading!