Leasing a Car is More Costly In Post-Pandemic Year, 2023

Regular readers of this column know that I’ve always felt buying a new car was generally preferable to leasing. The main reason is that leasing is more complex than buying. The cost of a lease is based on the “lease factor” (analogous to interest rate), “residual value” (estimated value of the vehicle when the lease is over), “capitalized cost” (analogous to the purchase price), the down payment (just like the down payment when you buy), the lease term (number of months), “purchase option price” (lessor’s right to buy the lease car at end of the lease term), and the most important and obvious to the lessor, the monthly lease payment.

 
All the items listed above are not quoted or advertised to potential customers but hidden in the fine print of the advertisement. All the prospective lease customer hears from the salesman or learn from the advertisements is the monthly payment. Most of us are “payment buyers” whether we buy or lease. We a have regular income that we earn each month and monthly expenses. Balancing the income against the expenses is called budgeting. We too often fall for the trap of buying because a monthly payment will fit into our monthly budget without analyzing the consequences of the TOTAL COST of a lease or purchase. This is why car dealers can lure us in with a low monthly payment, when, in fact, their making a very large profit. Historically, dealers’ average profits on leases are about twice the profits on purchases.

 
Post pandemic, leasing has become even more costly. If you leased a car in the past 2 ½ years, you can or have, exercised your option to purchase your off-lease car thousands below the market price. Today, this advantage has disappeared because used car residuals are much higher and there is no monetary gain for you when you exercise your purchase option. Pre pandemic dealers leased about 30% of their new cars; Post pandemic this percentage has dropped to about 9%. Furthermore, with the high demand and low supply of new vehicles, manufacturers and dealers are offering no special incentives to lease. Dealers can make as much or more profit on a sale vs. a lease simply because he can charge you thousands of dollars above MSRP, but leasing companies won’t allow this when he leases you a car. Remember that the dealer “sells” your lease car to the leasing company.

 
My advice to you is ignore all car dealer and car manufacturer advertising but be especially leery of lease advertisements. I can guarantee you that you will never find a lease payment advertised that doesn’t have very large down payment hidden in the fine print.