Why renting a car is a bad decision right now
ISoftening used to be the cheapest way to get a late-model luxury car into your garage. It’s just another thing that COVID-19 has changed.
Before the pandemic, leasing offered buyers a way to stay in a steady stream of new vehicles with lower monthly payments than an auto loan. Lessees would never own their vehicles, but rapid price depreciation and predictable maintenance costs would cushion the blow.
These days, a buyer looking for a new luxury vehicle at an affordable price is best served by a 72-month auto loan, says Tyson Jominy, vice president of data and analytics at JD Power.
He describes this as an “incredibly difficult time to praise,” and that isn’t expected to change anytime soon. Here’s what happens.
The cost of buying vs leasing a car
The generous incentives that leasing companies used to give to lower lease prices have disappeared as auto inventories have dwindled.
Auto leasing companies are now only offering $1,500 in financial incentives on the average auto leasing, less than half of the roughly $4,000 they would have been likely to offer before the pandemic, according to data from JD Power.
For the average car lease, that’s a discount of 2.7%, closing the gap between monthly lease payments and conventional car loans.
Auto rental mileage limits have dropped
These days, buyers who rent cars get literally less for their money.
Before the pandemic, the standard car lease came with an allowance of 12,000 miles per year. That’s since dropped to 10,000 miles. “So many customers were downgrading to 10,000 mile per year leases that this became the de facto advertised rate,” says Jominy.
It might not seem like a big difference, but it could cost you dearly if you find yourself heading back to the office — and doing a daily commute — or deciding to add another road trip to your vacation schedule.
Auto leases charge for each mile driven over the annual limit. At 30 cents a mile, 2,000 extra miles would add $600 to the cost of a lease.
Rising residual values not reflected in car rental terms
Automobile prices during the pandemic have defied depreciation, but leasing terms are not reflecting it.
Thanks to a shortage of semiconductors, a supply chain crisis and a global pandemic, the average price of a used car hit $28,205 by the end of 2021, according to Kelley Blue Book. That’s an increase of 28% from the previous year and 42% from December 2019, the month before the United States confirmed its first case of COVID-19.
These higher used car values should theoretically translate into cheaper monthly payments for lessees, but they are not part of the equation. And since vehicles are so hard to find, there’s not much pressure for leasing companies to change their approach.
National auto inventories are at their lowest level in nearly 30 years, according to the U.S. Bureau of Economic Analysis.
If you rent a car, consider buying it
The best car deal right now may be to buy out your lease when it expires.
Purchase prices are set at the start of a lease, which means cars whose leases are about to expire are now selling at pre-pandemic prices, providing the rare opportunity to profit from an auto lease.
The average price of a new car reached $47,000 in December, the highest price ever according to Kelley Blue Book. It’s close to $10,000 over the past two years.
“You could buy out your lease right now and flip it for a profit,” Jominy says.
Even trading in your old lease at a dealership is a better deal when you can buy now at a pre-pandemic price.
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