Leasing a used vehicle is indeed a viable option, although it’s important to note that not every dealership offers this service. The process requires some patience and effort, as you may need to contact various dealerships to find one that provides leases on used cars. The reason for the rarity of this option is the risk associated with predicting the future value of a used car, which can be more variable than that of a new car.
When you do find a dealership that offers used car leasing, it can be an excellent way to access a newer model at a more affordable rate than buying new. Many leased used cars are certified pre-owned, which often includes the benefit of a warranty. Additionally, you might find vehicles with enhanced features or higher trim levels for a better value.
Recent market studies have provided insights into the used car market dynamics. In the third quarter of 2023, the average transaction price (ATP) for used vehicles dropped by 5.5 percent compared to the same quarter in the previous year. This decline is notable, especially when considering that in August, the proportion of used cars priced under $20,000 decreased to 12.4 percent from 49.3 percent in 2019, signaling a shift towards more traditional market patterns.
The gap in pricing between new and almost-new used vehicles is also widening. Typically, a new vehicle loses value quickly with even minimal use. However, during recent market disruptions, “nearly-new” used vehicles were priced almost as high as new ones. There’s now an average difference of $13,686 in price between new cars and used cars under three years old. In September 2023, the prices for used cars up to 36 months old saw a year-over-year decrease of 4.8 percent.
Despite these trends, the return to a stable, pre-pandemic used car market is not guaranteed. The demand for pre-owned vehicles remains high, leading to quick sales as soon as they are available. This high demand keeps prices elevated; in 2023, cars with a certain age and mileage were about $10,000 more expensive than in 2019. Furthermore, the quick sale of newer, lower-mileage cars means that the average used car on the market is now older and has higher mileage than it did four years ago.
As we step into 2024, the question of whether leasing a car is a sensible choice remains a relevant and complex decision for many consumers. The automotive landscape continues to evolve with technological advancements, economic shifts, and changing consumer preferences. In this context, leasing a car, as opposed to purchasing it outright or opting for alternative transportation methods, requires a thoughtful assessment of various factors including personal financial circumstances, driving habits, and future market predictions. This article aims to explore the pros and cons of car leasing in the current year, delving into the latest trends in the auto industry, the financial implications of leasing versus buying, and how shifts in consumer lifestyles and preferences might influence this decision. Whether you’re a long-time lessee considering your next move or a first-time car user weighing your options, understanding the nuances of car leasing in 2024 is crucial to making an informed decision that aligns with your personal and financial goals.
How does used car leasing work?
Leasing a used car typically involves selecting a certified pre-owned (CPO) vehicle, generally not more than 4 years old and with less than 48,000 miles on the odometer, from a dealership.
The process of leasing a used car is quite similar to that of a new car lease. The lending institution, often the automaker’s own financing division (like Toyota Financial for Toyota dealerships), calculates the car’s residual value and sets the lease payments based on the difference between the car’s sale price and this residual value. Since cars depreciate at different rates, the residual values also vary.
For used car leases, the lender assigns a ‘money factor’, which is essentially the interest rate on the lease, akin to that in new car leases. However, the money factor for used cars tends to be higher, mirroring the trend in used car loan interest rates. Despite the higher money factor, leasing a used car can still be more cost-effective than buying one, mainly because of the lower sale price and slower depreciation rate of used vehicles. This often results in lower overall monthly payments. Additionally, just like with new car leases, there is usually an option to purchase the car at the end of the lease term.
Pros of Leasing a Car:
Lower Monthly Payments: Lease payments are often lower than loan payments for a new car purchase, as you’re essentially paying for the car’s depreciation during the lease term rather than the full purchase price.
Access to Newer Models: Leasing allows you to drive a newer vehicle every few years without the hassle of selling or trading in.
Warranty Coverage: Most leases last for the duration of the car’s warranty period, meaning most repairs will be covered.
No Long-Term Maintenance Worries: Since you’re driving the car during its early years, it’s less likely to require major repairs.
Tax Benefits for Business Use: If you’re using the car for business, lease payments can often be deducted as a business expense.
No Resale Concerns: You don’t have to deal with the depreciation and the process of selling the car; you just return it at the end of the lease.
Cons of Leasing a Car:
No Ownership Equity: At the end of the lease, you don’t own the car and have nothing to show for the payments made.
Mileage Restrictions: Leases typically have mileage limits, and exceeding them can result in hefty fees.
Wear and Tear Charges: You could face extra charges for damage beyond normal wear and tear when you return the car.
Early Termination Costs: Ending a lease early can be costly due to early termination fees.
Higher Insurance Costs: Leased vehicles often require higher levels of insurance coverage, which can lead to higher insurance premiums.
Limited Customization: Since the car must be returned in a condition acceptable to the dealer, you’re limited in how much you can customize or modify the car.
Long-Term Cost: In the long run, leasing several cars over many years can be more expensive than buying and keeping a vehicle.
Used Car Leasing: A Good Idea?
Leasing a used car can be a good idea under certain circumstances, but it’s not universally the best option for everyone. The decision largely depends on individual needs, financial considerations, and lifestyle preferences.
Financial Benefits: One of the primary advantages of leasing a used car is the potential for lower monthly payments compared to leasing a new car. Since used cars have already undergone significant depreciation, the lease payments are calculated on a lower base value, leading to savings. This can be particularly appealing for those who desire a higher-end car but are constrained by a tighter budget. Furthermore, if the used car is a certified pre-owned (CPO) vehicle, it may still be under warranty, reducing the risk of high maintenance costs.
Considerations and Limitations: However, there are some caveats. Used cars can have higher interest rates (money factors in leasing terms), which can offset some of the cost savings. Additionally, used cars might not have the latest technology and safety features available in newer models. The selection of available vehicles for lease may also be limited, which could be a drawback for those looking for specific makes or models.
Lifestyle Fit: For those who enjoy frequently changing vehicles and always driving relatively newer models, leasing used cars might not be as satisfying. On the other hand, it can be an excellent choice for individuals who appreciate the lower cost of entry into a higher-end vehicle and don’t mind driving a car that’s a few years old.