Experian reports that average monthly new car payments were at an all-time high in the fourth quarter, and that consumers are turning to leasing to reduce payments.
According to Melinda Zabritski, senior director of automotive credit, “Consumers often purchase vehicles based on a low monthly payment,” and now are “turning to leasing as a cost-effective alternative.”
The problem is that leasing usually costs more.
A lease price may be $100 or even $300 less than a loan payment, and $299 a month looks a lot better than $399 a month at first glance.
However, when you lease you never actually own the vehicle, so a consumer will be paying that $299 per month forever — after the lease runs out, you have to either replace it with another lease or face another lease vs. buy dilemma .
The $399 per month car buyer, on the other hand, owns the vehicle free and clear after 48 or 60 months (however, loan lengths are increasing — but that’s the subject of a different post.)
So the question is: Is it more cost effective to pay $299 per month for, say, the next 10 years, or pay $399 a month for 5 years, and nothing more after that.
In this example, the car leasee, at $299 per month, pays $35,880 in total, while the car buyer at $399 per month pays $23,940 – and owns a car after 10 years that he/she can continue to drive or to sell for a down payment on a new vehicle!
Leasing is a complicated transaction but, from a dollars and cents perspective, realize that it usually costs more than buying.
To see a more extensive discussion, see our post here.