Leasing used to be a great way to get a car, but economic conditions have made this a less popular route.
A car lease typically allows you to “rent” the car for a fixed number of miles and months, and, according to Bankrate, the monthly cost of leasing is lower than an auto loan.
There are a few benefits to leasing. It is cheaper than taking out an auto loan and buying the vehicle, and doesn’t require a down payment, per Auto Approve. Leasing also makes it easier to switch to a new car every few years.
What to look out for in 2023
The Federal Reserve continues to raise interest rates to combat inflation. The domino effect has led auto loan rates to spike as well. New and used cars are being leased out at the average rate of 6.5% and 10%, respectively, compared with 4.1% and 7.4% a year ago, per CBS News.
Analysts at Edmunds, an online guide for car shoppers, found a few emerging trends in the latter part of 2022. Firstly, many consumers who financed a new automobile committed to payments of $1,000 or more and were willing to put down larger down payments to offset costs.
Secondly, the average down payment was nearly $3,900 for used cars and $6,700 for new ones. And third, among luxury shoppers, a growing number are opting to buy instead.
“At the onset of the pandemic, consumers benefited from low-interest rates and elevated trade-in values, helping shield even the more questionable financing decisions from resulting in negative equity. This unique confluence of market forces resulted in some vehicle owners being able to take advantage of positive equity on their loans and even their leases,” said Ivan Drury, Edmunds’ director of insights.
“But as we shifted toward an environment with diminished used car values and rising interest rates over the past few months, consumers have become less insulated from those riskier loan decisions, and we are only seeing the tip of the negative equity iceberg.”
Buying or leasing — what is the best move?
Apart from considering some of the benefits and the current market state, it’s also good to take a look at the actual numbers to see what works best.
According to Motor Biscuit, finding out a car’s residual value — the amount it would take to pay it out — can help make a decision.
“If you have a payoff amount of $20,000 and they’re selling this car for $26,000 on the market, go for it. But if you have a $20,000 payoff and it’s going for $20,500, turn in the car and do what you want to do, don’t stick to just that car,” said Ari Janessian with Negotiation Guides, an automotive consulting company.