Should You Lease a Car or Buy New?
Shhhh. Don't tell anyone where you heard this.
Automotive journalists aren't ever supposed to say something like this, so lean in close: maybe you shouldn't buy a new car right now.
What? With gas prices spiking, shouldn't you be looking to trade down for something more fuel-efficient? Shouldn't you consider the carmakers' employee pricing deals or clearance events? We've all seen the stories about record low auto sales this year. Isn't this a buyer's market?
Well, yes. Those are all reasonable arguments. But you still might not want to buy a new car. Hold onto what you have for as long as possible -- and if you absolutely must replace your daily driver, consider leasing a new car while you still can. It could be easier to buy the perfect new car in a few years than to buy now, and a good lease on a 2009 could give you the freedom to do that.
Why Leasing Makes Sense
#1: You don't want to be stuck with a 2009 car in 2014
Because the design process for a new car takes about two to three years, the new 2009 model-year cars reaching dealership lots this fall were conceived on drawing boards in 2005 or 2006, when gas prices were just over two dollars a gallon. These cars weren't designed for a world of four-dollars-a-gallon gas. Cars that fit today's reality are still in the design stages and coming to dealerships in 2010 or later.
The smallest car Ford could sell you today (a 2008 Focus) would net an EPA-estimated combined fuel economy rating of 28 mpg. The most fuel-efficient mass-produced car on the road today, the 2008 Toyota Prius, is rated for 46.
But in just a year or two, you'll see a much more impressive set of stickers on new car windows. Ford could sell you a Fiesta, a subcompact that wowed the automotive press at the Geneva Motor Show last spring and reportedly gets almost 40 mpg. According to Toyota engineers, the next generation of the Prius could win an EPA rating of 94 mpg.
According to the U.S. Department of Transportation, the average new car buyer will hold onto their purchase for eight years. Edmunds estimates that the term of the average new car loan has stretched to over 62 months. So if you were to buy a 2009 model-year car, you'd probably be paying for it until 2014 and driving it until 2016 -- when automakers will have had years to improve on the already-impressive fuel economy numbers of 2010 models.
Oh, and when you decide to get rid of that 2009 car at last, you'll be left trying to sell an old car with poor fuel economy in a market that long ago passed it by. Most leases, on the other hand, last three years. Lease a 2009 today, and in late 2011 you'll be able to give it back to the dealer and get one of those post-2010 cars.
#2: Leasing protects you from unexpected depreciation
Millions of drivers who bought SUVs in the world of cheaper gas have learned a harsh truth this year: depreciation is a big risk. SUVs have lost value much quicker than anyone predicted, thanks to soaring gas prices. Some dealerships won't even accept SUVs as trade-ins anymore, and owners hoping to sell them on the private market are forced to accept offers thousands of dollars below what they thought the car would be worth.
Those who leased an SUV, however, are just handing their headaches back to dealers and walking away scot-free. In fact, Ford -- one of the most successful SUV manufacturers in recent years -- has lost $2.1 billion on returned trucks and SUVs in the first half of 2008 alone. When customers turn in the vehicles, their residual value is much lower than the company had expected -- and Ford Credit eats the difference.
#3: This may be your last chance to lease
In 2004, GM made more money leasing cars than selling them. But today those numbers have completely flip-flopped. Leases are proving to be a huge risk for automakers -- a risk they may not take much longer.
On July 27, Chrysler Financial announced it would stop offering leases altogether. Two days after Chrysler's decision, GMAC, North America's biggest auto lender, announced an end to lease incentives in Canada. GM hasn't followed suit in the U.S. yet. All the General will tell its dealers, so far, is that it won't stop offering leases for now. Long term, they make no promises.
Ford, after announcing that jaw-dropping loss on leased vehicles, didn't stop offering leases. They simply raised the payments on many leases so that they make little sense for buyers.
But some automakers -- particularly the imports -- still offer favorable lease deals. And if you need a new car this year, it might make sense to get into one of those leases now, return the car in three years and then think about buying.
Why You Might Buy Now Anyway
Leasing has two major drawbacks. The first is mileage limits. If you're going to exceed them, a lease won't make sense for you. But with Americans driving fewer miles than ever before as we look to save on gas, agreeing to a mileage limit would make sense for many of us. At $4 a gallon, we're not going to drive more than we have to, anyway.
The second drawback is that the payments never end. Provided they hold onto it long enough, a buyer will eventually own a car without making payments on it. A lessee never will. In the long run, it often makes more sense to buy and hold onto a vehicle for as long as possible.
Whether you buy or lease, make sure you get the most for you money. Take advantage of any rebates, incentives and other promotions, and negotiate from a strong position by having multiple dealers compete for your business: