If you’re a regular reader of my column, you’ve read several articles over the years on this very topic.
You might be wondering why, when there are so many other important issues renters and car owners have to deal with.
One of the main reasons I write about renting again is that I always get more emails, texts and calls to my weekly radio show (“Earl on Cars”) on the subject “rent or buy” than anything else.
Another reason is the drastic effect the COVID pandemic has had on the global economy, especially the automotive industry. If I had had a “crystal ball” three years ago, I would have written a column called “Rent, Don’t Buy Your Next Car.”
If you leased your car three years ago, you have (or had) the advantage of low rent due to a supposedly accurate or supposedly high residual, but more importantly, you have (or had) the opportunity to buy your car at the end of the lease for several thousand dollars less than the current market value. As you probably know, this is due to the unprecedented demand and low supply of used (and new) vehicles today.
In previous columns before 2020, my general advice was that rent or buy was almost a 50-50 proposition for the more sophisticated and educated consumer. For others, I advised that the purchase was easier to understand and therefore less likely to be exploited by unscrupulous car dealers.
In today’s “new normal” market, the pendulum has swung more towards buying as the preferred choice. This was largely because manufacturers often promoted rental to encourage more people to rent. Indeed, people who lease a particular brand vehicle are much more likely to lease or purchase another vehicle from the same manufacturer. There are no such incentives in today’s market.
Additionally, the most important factor in calculating a lease payment is the lessor’s estimate of the value of the leased car at the end of the lease. This value is called the “residual”. The lessor owns the car, and will in any case resell the used car at the end of the lease. The lessor sells non-leased cars at auction, to the car dealer or to the lessee if he exercises his leasing option. After the economic trauma of the last two and a half years, leasing companies today have much less confidence than ever in establishing an accurate residual value. Therefore, they will try to err on the “low side” of residual value. This increases your monthly lease payment. This is a tricky decision for leasing companies, because if the residual is too low, the lessee is more likely to exercise their purchase option. Since residual values are now very low and represent huge windfalls for tenants, landlords fear setting them too low. But they will try to keep them a bit lower to maximize the monthly payment.
Today, nearly every car dealership sells new cars for thousands of dollars above MSRP and earns higher profits than ever in automotive history. Before COVID, their average profit margin on a purchased car was only about half of what they earned on a lease. Almost all dealerships tried to persuade buyers to switch to leasing, as they could make at least twice as much profit as buying. They did this by manipulating the term, rate, trade-in allowance, and capitalized cost. Most lease buyers only focus on the monthly payment, which allows the dealership to secretly increase their profits. In today’s unprecedented new-car seller’s market, auto dealers are making so much profit selling cars that they don’t care about “turning you to a lease” anymore. For the first time, car dealerships are making significantly more money selling cars than renting them. That’s not to say a car dealership couldn’t make a really big profit on a lease, but there’s less incentive and it’s harder to get something like that after the leasing company and the customer.
Ultimately, if you’re an informed buyer or renter, you should be able to buy or lease a car today at roughly the same, albeit very high, comparative price. ¦