Should You Lease a Car Until Prices Come Down?

The cost of purchasing a new car has significantly increased since the COVID-19 pandemic. In May 2023, the average cost of a new vehicle was estimated at $48,528, exhibiting a whopping 30% increase since right before the pandemic. This surge in car prices has made the purchase of a new vehicle more unaffordable for most people. However, there is an alternative solution that may allow you to attain a car without investing a lot of money upfront: leasing. With car prices at all-time highs, is it worth leasing one until prices come down?

How does a car lease work?

A car lease is an agreement between a person and a dealership that allows the person to use a car for a predetermined amount of time, typically two to three years. During this period, the person pays a monthly fee, which covers the depreciation of the vehicle as well as interest on the lease.

At the end of the lease, the person can either return the car and walk away, or purchase it for an agreed-upon price. Leasing can be a practical option for those who want to drive a new car but don't want to commit to a long-term loan.

Additionally, because the monthly payments are typically lower than loan payments, a lease can allow you to purchase a nicer car with a lower price tag. However, it's important to weigh the costs and benefits before signing a lease, as there will be restrictions on mileage and wear and tear.

Advantages of leasing

Leasing provides a viable way to get a new car without investing a lot of money upfront. When you lease, the monthly payments are generally lower than if you were to purchase the car. This is because you're only financing the vehicle's depreciation during the lease term, rather than the entire cost.

Additionally, since you are only leasing the car for a fixed period of time, you may be able to switch to a new car after the lease term ends and prices may have come down by then. Furthermore, leasing enables you to drive a new car with up-to-date features, reducing the chances of running into repair issues commonly found in old cars.

Drawbacks of leasing

One of the significant drawbacks of leasing is that you do not own the car, you're only borrowing it for a specific period. This means that there will be rules that you must follow, including mileage restrictions and limitations on customizations.

Financing a new car will generally cost you more than leasing, but you will have the freedom to sell the car whenever you want. You are stuck in your lease for the duration of the term. Ending your lease early can be expensive due to penalties, and modifying your car can lead to fines and penalties.

But if you purchase a car, you can eliminate payments once you pay off your loan. Then you have an asset that is paid off. Additionally, due to increased demand for leasing as an alternative to purchasing, monthly payments for leased vehicles are also increasing, making the leasing option less attractive.

Car leases have dropped significantly

The pandemic brought about significant changes in the car market. Prior to COVID-19, leasing was a popular option for almost one-third of new car buyers. However, this trend has declined sharply, with only 19% opting to lease in today's market.

This decrease in leasing is primarily due to higher new car prices. These high prices have caused lease payments to skyrocket, making them unaffordable for many buyers. Currently, the average lease payment equals the average loan payment from 2020.

In addition, lessees are holding onto their cars for longer, because leased vehicles are now surpassing their buyout price. Normally, lessees would return the car to the dealer and initiate a new lease agreement, but recent price increases have changed that.

Another factor is that the current lease offers are not appealing to consumers. With automakers and dealers making more profit off a sale than a lease, they are not offering attractive lease terms. As new car demand continues to exceed supply, the trend of declining car leasing is likely to continue.

Factors to consider before leasing

Before leasing a car, it is essential to weigh all the options and consider all your financial obligations. You should ensure that the monthly lease payments fit into your budget, so review your finances to determine whether you can afford the payments.

Additionally, take into account the length of the lease term, the annual mileage allowance, and the potential costs that come with ending your lease early. It is advisable to research the car model that you want to lease and compare prices from different dealerships to ensure you get the best lease deal.

Consider leasing alternatives

Rather than leasing, it might be best to consider alternatives such as buying a used car. The average cost of a used car has dropped and is now $27,256, about 45% lower than the cost of a new car.

There are two ways to get a car loan, one from the dealer or through outside financing, such as a bank. Getting outside financing can save you thousands of dollars, since dealers mark up the interest rates for loans they arrange.

Despite the lower monthly payments of a lease, the high price of cars has made leasing more expensive and less appealing. Before making a decision to buy or lease a car, do your research. You should factor in your personal and financial situation as well as other leasing-related considerations before making decisions. It is always advisable to shop around for the best deals, compare prices, and be sure you understand all terms and conditions. Leasing alternatives such as buying a used car or buying a car with outside financing could be better suited to your personal situation and needs.