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With car-leasing prices on the rise, here’s what to know before you sign on the dotted line
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With record-high auto prices, higher interest rates and generally weakening residual values on cars, consumers can expect to pay $1,600 more on average for a lease than they did in 2016, according to data from car researcher Edmunds, which analyzed the top 10 most leased cars (excluding trucks). On a typical three-year loan, that works out to an average of $44 more monthly.
As the price of new autos continues to climb — it averaged about $36,500 in March — a growing number of consumers are balking at buying. Close to half (48%) now think owning or leasing a car is becoming too expensive, compared with 42% in 2015, according to separate research released this week from Cox Automotive.
At the same time, however, consumers have shifted their preference to pricier SUVs and pickup trucks and away from lower-cost sedans and smaller cars. Improved technology and safety features add to the price as well.
“When you couple higher interest rates with the desire to move from a hatchback or sedan to a utility vehicle, which are generally more expensive, you’re seeing a pinch on affordability for a lot of shoppers,” said Kelsey Mays, senior consumer affairs editor at Cars.com.
The spring selling season will heat up with the New York International Auto Show, which opens to the public on Friday and runs through April 28. Nearly 1,000 cars and trucks will be on display, including new models and concept cars.
While leases offer a way to get into a new car at a lower monthly cost, even those lower payments might be moving out of reach for more buyers. The average monthly lease payment is $487, according to Cox. That compares with $548 for a new-car purchase and $411 for used cars.
At the same time, the price gap between new and 3-year-old used vehicles has been growing. Last year, buyers saved an average of $13,700 by choosing a used car instead of a new one, compared with about $11,400 in 2013.
If you find yourself looking for lower-cost alternatives to signing another lease on a new car, you could check out a certified pre-owned car. They often come with a 100,000-mile powertrain warranty, which can ease concerns about footing the bill for major repairs.
Leasing activity, as a share of transactions
“Some people have leased because they want a cheaper, hassle-free car,” Jones said. “Those certified pre-owned cars could be an alternative for someone if they can’t find what they’re looking for in a lease.”
You also could consider buying your leased car outright. While interest rates on used cars are generally higher than those on new cars, the difference is less pronounced than it had been, partly because zero percent deals for new vehicles have largely disappeared.
The amount you pay each month is generally based on the car’s depreciation — the amount its value will drop during the life of your lease — plus any sales taxes and interest, and less any down payment you make. The total is divided by the number of months in your lease.
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Say the purchase price starts at $25,000 and the non-negotiable residual value is $15,000. If you can get the purchase price down to, say, $24,000, the amount of depreciation that you’re paying for is $9,000 instead of $10,000.
Certain fees on the lease also could be negotiable, so it’s worth trying to bring those costs down.
Also be aware that the cost of financing a lease is expressed differently than it is with loans. Leasing companies use a number called the “money factor,” and the math involved in converting that amount to an interest rate can be tricky. However, the dealership should be able to do it for you so you know what you’re paying.
Also remember the mileage limits. If you go above the allowed amount — typically 12,000 a year — you’ll pay for it. That can range from about 15 cents to 25 cents at the end of the lease for each extra mile you racked up. At that rate, each 1,000 extra miles would cost about $150 to $250.
Additionally, most lease contracts include so-called GAP insurance, which would pay the difference if your car is totaled or stolen and you owe more on the lease than the car is worth. Nevertheless, consumers should double check the terms to ensure they’re fully covered, according to Edmunds.