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    Leasing Reaches Record High, Could Grow Further


    • Leasing is becoming very popular for buyers because of low payments

    Sales of new cars have been reaching all-time highs and part of the reason comes down leases. The Detroit News reports that nearly one in three vehicles built for the U.S. is leased. Data from Edmunds shows 2.2 million vehicles were leased in the first half of 2016. Not only is this up 13 percent from the same time year, it is double the volume from 2011. Steven Szakaly, chief economist for the National Automobile Dealers Association tells the Detroit News there is plenty of space for more leases.

    “I think this could easily be 40 percent of the market,” said Sazkaly.

    Why have leases become popular? It comes down to the monthly payment. Compared with payments for auto loans, lease payments are on average 23 percent less. Leasing is also a popular option for younger folks. Jessica Caldwell, analyst for Edmunds says the reason is leasing is like a cell phone contract; low monthly payments and knowing that you can get into a new car in a few years.

    But while leasing is helping new car sales, some analysts are worried this could cause used car prices to go down. Why? A glut of turned in leased vehicles will flood the used car market, causing prices to be slashed to move metal.

    “They’ll swamp the market, they’ll force residuals down,” said Sean McAlinden, chief economist for the Center for Automotive Research.

    The increase in leasing is already having an effect on used car values. Tom Webb, chief economist for Cox Automotive Inc., said 2.55 million vehicles came off lease last year. That number will increase to 3.1 million this year. Automakers are now figuring out ways to sell this glut of vehicles while keeping values up.

    Source: The Detroit News

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    People wanting to be in the jones jones race of upping their friends by one will lease to get into a higher level auto than to accept that they can only really afford X. This will cause a bigger increase in debt and in lower residuals plus a glut once these low miled used auto's hit the market.

    In 2-3 years I expect another auto correction of poor sales and a flood of auto's on the market.

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    5 hours ago, dfelt said:

    People wanting to be in the jones jones race of upping their friends by one will lease to get into a higher level auto than to accept that they can only really afford X. This will cause a bigger increase in debt and in lower residuals plus a glut once these low miled used auto's hit the market.

    In 2-3 years I expect another auto correction of poor sales and a flood of auto's on the market.

     

    So much wrong here I don't even know where to begin.

     

    Just a lot of 'no'.

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    5 hours ago, Frisky Dingo said:

     

    So much wrong here I don't even know where to begin.

     

    Just a lot of 'no'.

    Start at the beginning of what you think is wrong as I see this all around me every day, homes that can barely pay their mortgage with high end luxury auto's going paycheck to paycheck. When all the lease auto's come back in the prices are depressed. 

    Good deals for those of us willing to buy a lease return with full warranty.

    We have alrady seen the auto industry based on leases and big discounts hit record sales only to have it follow by a depressed market. This will repeat itself again and again.

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    Leases are huge on Cruze, Elantra, Focus type cars because people can lease them for $179 a month, when you can't even buy a $10k used car for that monthly payment.    That puts a lot of cars on the used market at 3 years old, probably bad for resale but good for used car shoppers.

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    13 hours ago, dfelt said:

    Start at the beginning of what you think is wrong as I see this all around me every day, homes that can barely pay their mortgage with high end luxury auto's going paycheck to paycheck. When all the lease auto's come back in the prices are depressed. 

    Good deals for those of us willing to buy a lease return with full warranty.

    We have alrady seen the auto industry based on leases and big discounts hit record sales only to have it follow by a depressed market. This will repeat itself again and again.

    People not living within their means is definitely more of a rule than an exception these days, I will grant you that. And some people leasing more car than they need due to incentives is not a wise decision. That is not what I was disputing. 

    What this piece conveniently ignores is that many people are on this ~3 year trade cycle anyway. So just because leasing is growing in popularity doesn't mean the market will be flooded by trade ins by default. The market will become more saturated in trades in general because of the higher sales numbers the car market has been enjoying. In fact, I would say the higher lease numbers will have the opposite effect on used car values. People are turning cars in that have to meet certain requirements so as not to be penalized at lease in. Cars in better condition with lower mileage than comparable non-leased cars are going to have higher values.

    The bigger problem is a market whose sales are being padded by bogus reports and bolstered by extreme incentives. Those are what's responsible for the massive increase in car sales. Along with looser lender requirements and low fuel costs. The market was bound to become flooded in second cars anyway, leasing in and of itself is not the culprit.

    Many people are just becoming aware of how beneficial leasing is, how much money it can save you, and how much it can alleviate the fear of unknown variables over the course of ownership. It's not some evil that is going to crash the car market and needs to be vanquished. That's really a short sighted and misinformed notion.  

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    Yeah leasing properly can really benefit somebody. For instance, if my mom OR dad leased one of their two vehicles they'd probably save a munch of money. They both live only 3 miles from work but they di visit my sister a handful of times a year in IA so they would still surpass the minimum mileage on ONE of their vehicles. Then again, my dad keeps their vehicles for ~7-8 years so they do get their monies worth from them as-is. Similar situation for a buddy of mine's fiancé. He said once her car is paid off they will likely lease her next car because she puts so few miles on it.

    If you can fit into the bottom two rungs of a lease mileage-wise it can be pretty beneficial.

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    Audi of washington has a tone of lease specials on the whole product line, example is their AWD A6 on lease special of $519 per month for 36 months for 7500 miles a year. 

    To me that is a crazy that you would spend that kind of money with so few miles allowed and be stuck with it for 3 years.

    I understand the leasing from a business standpoint and being able to drive new every 2-3 years. But I hate payments and would rather buy what I like and drive it way longer. 

    Then again, I am the exception as I still drive my 1994 GMC SLE Suburban as well as all my other fine auto's I own. :P

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    Leasing can make sense for a lot of people for a lot of reasons.  BMW seems to under write their leases to encourage people to buy new BMW's they then can turn around and sell them as CPO cars two or three years later.  Sell the same car twice....hmmm.....

    Personally I think repair costs have gotten so high and people do not have a lot of discretionary income or a lot of knowledge of cars, so leasing keeps them under a warranty and one less thing they have to worry about.

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    I can see the day where cars are never sold again, you pay for the right to drive it and after so long, you can then drop to month by month or drive it into the dealer, they put the car into a special recycling slot and out the other end comes your new auto you just ordered. No wait, custom order, custom build auto's on demand.

    Reminds me of the scene in Minority Report.

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    5 hours ago, dfelt said:

    I can see the day where cars are never sold again, you pay for the right to drive it and after so long, you can then drop to month by month or drive it into the dealer, they put the car into a special recycling slot and out the other end comes your new auto you just ordered. No wait, custom order, custom build auto's on demand.

    Reminds me of the scene in Minority Report.

    I could very well see car makers retaining the right to the software and refusing to update it, thus making the car functionally obsolete.  Tesla already updates over the internet wirelessly IIRC, I for see some sort of mandated turn in.

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    8 hours ago, A Horse With No Name said:

    Leasing can make sense for a lot of people for a lot of reasons.  BMW seems to under write their leases to encourage people to buy new BMW's they then can turn around and sell them as CPO cars two or three years later.  Sell the same car twice....hmmm.....

    Personally I think repair costs have gotten so high and people do not have a lot of discretionary income or a lot of knowledge of cars, so leasing keeps them under a warranty and one less thing they have to worry about.

    Completely agree with your second part. Auto makers are making vehicles to the point where average joe can barely touch his own car because it's just so complex or difficult to get to certain areas of a car. Then there are hybrids with insane electricity "flowing" through them that you have to be extra careful with. 

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    9 hours ago, ccap41 said:

    Completely agree with your second part. Auto makers are making vehicles to the point where average joe can barely touch his own car because it's just so complex or difficult to get to certain areas of a car. Then there are hybrids with insane electricity "flowing" through them that you have to be extra careful with. 

    The body control computer thing is downright frightening from a cost standpoint. Cruze near me got hit by lightening,  Body shop said to scrap the car even though it looked fine. Insurance wanted it fixed any ways.  Bill came to fourteen grand by the time all of the body control computers and electronics were replaced. 

    Fourteen grand is a lot of scratch for a three year old fairly base Cruze.

    Edited by A Horse With No Name
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    1 hour ago, A Horse With No Name said:

    The body control computer thing is downright frightening from a cost standpoint. Cruze near me got hit by lightening,  Body shop said to scrap the car even though it looked fine. Insurance wanted it fixed any ways.  Bill came to fourteen grand by the time all of the body control computers and electronics were replaced. 

    Fourteen grand is a lot of scratch for a three year old fairly base Cruze.

    How did that not get totaled out? That had to be like 90% of its value if it was fairly base and a few years old.

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    A 3 year old Cruze is not worth 14 grand. Not even an LTZ. That car should have been totaled, no question.

     

    Also guys, you should know that leasing actually works even BETTER for people who drive a lot of miles annually.

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    I never would have guessed. I just assumed a smaller payment for the lease would save you money while the car is depreciating no matter what while I "own" it, somewhat regardless of the miles put on it.

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    42 minutes ago, Frisky Dingo said:

    Also guys, you should know that leasing actually works even BETTER for people who drive a lot of miles annually.

    Actually that is only as long as you stay within the contract of 12K or 15K miles. Otherwise, the cost is incredibly expensive. Example is if I leased my Escalade for 15,000 miles, I would have had to pay an extra $3750 per year as during the first 4 years I averaged 30,000 miles a year driving. So the first 15,000 would have been covered under the lease at $1099.00 per month on the 15K year deal for 36 months. But then I would have had to pay up another $11,250 at the end of the lease and go into another lease. At least my escalade I own and now that I do not drive it that much, since it is a 2006, 10 years later, it is now considered low mileage as I only use it for personal long distance road trips. So about 10K a year and it is paid for but I have total comfort and luxury for my road trips.

    End result is Leasing works for the Right Use Case. 

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    50 minutes ago, Frisky Dingo said:

    A 3 year old Cruze is not worth 14 grand. Not even an LTZ. That car should have been totaled, no question.

     

    Also guys, you should know that leasing actually works even BETTER for people who drive a lot of miles annually.

    Exactly, because a high end car will depreciate more than the mileage penalty.  You really screw with idiots like BMW when you turn a car in that won't go CPO because of mileage.

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    2 minutes ago, dfelt said:

    Actually that is only as long as you stay within the contract of 12K or 15K miles. Otherwise, the cost is incredibly expensive. Example is if I leased my Escalade for 15,000 miles, I would have had to pay an extra $3750 per year as during the first 4 years I averaged 30,000 miles a year driving. So the first 15,000 would have been covered under the lease at $1099.00 per month on the 15K year deal for 36 months. But then I would have had to pay up another $11,250 at the end of the lease and go into another lease. At least my escalade I own and now that I do not drive it that much, since it is a 2006, 10 years later, it is now considered low mileage as I only use it for personal long distance road trips. So about 10K a year and it is paid for but I have total comfort and luxury for my road trips.

    End result is Leasing works for the Right Use Case. 

    Exactly the point...if you wanted to drive an Escalade a ton of miles and turn it back in....a 90,000 mile Escalade will have a ton of depreciation....

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    Frisky, care to explain how leasing is better for people who drive a lot annually?

    Most of the leases are 12-15k a year.  How is it beneficial to somebody who drives 20-25k a year?

    1 hour ago, Frisky Dingo said:

    A 3 year old Cruze is not worth 14 grand. Not even an LTZ. That car should have been totaled, no question.

     

    Also guys, you should know that leasing actually works even BETTER for people

    who drive a lot of miles annually.

     

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    34 minutes ago, ykX said:

    Frisky, care to explain how leasing is better for people who drive a lot annually?

    Most of the leases are 12-15k a year.  How is it beneficial to somebody who drives 20-25k a year?

     

    On some cars the mileage penalty is less than the actual depreciation of the vehicle.  i know very little about leasing, but from what I do know this works best with Luxury vehicles.

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    Firstly, you are not limited to 12,000 or 15,000 miles annually. That is just how most standard leases are figured. They're simply calculated on an average, because that's how many miles most people drive a year. You can buy more miles before hand. So you have a lease designed around 25,000 miles, or 30,000 miles, or however much you need. I've done a 18,500 annual mile lease before. The key to remember is that excessive mileage depreciates your car whether you own or lease it.

    Here's an example of how it is still cheaper to lease, even with high annual mileage-

     

    You can buy additional miles on most leases for $.15-.20 a mile. So let's say you drive 25,000 miles a year. You lease for 3 years, so are essentially buying 30,000 extra miles- 10,000 miles over 15,000 standard annual miles x 3- for let's say $.18 a mile. So you have $5,400 cost for additional miles. You have bought these miles going into the lease, the cost of the extra miles is figured into the car's worth at lease end. You are still able to walk away clean at that point in time.

    The other way is you buy the car, and drive ~10,000 miles more a year than the average. You go to trade the vehicle in after 3 years time with 75,000 miles on it, and you are considerably over the average miles on similar aged vehicles. So you will have a deduction on your car's value on account of excessive mileage. In such a scenario, depending on the vehicle, you can expect to be deducted roughly $.30 a mile. 

    Now if we were break this up and calculate a total cost over those 3 years, it would be as follows-

    Scenario 1- Car costs $45,000 and and has 3yr, 45,000 residual of 57%. So $25,650. Minus $5,400 additional miles. So $20,250. Let's say after incentives and discount CAP cost is $38,500 (which is totally doable). So you have $18,250 of depreciation over the course of ownership. Over 36 months, that's $507 a month. Before tax and money factor. Add taxes and MF, and let's call it $570. First payment with fees is gonna run ~$620. $570 x 36 + $620 = $20,570.

     

    Scenario 2- Car costs $45,000 and after discounts and incentives (which are almost always worse on buy vs lease) you're out the door at $39,500. You financed that for 60 months @ 2.49% and get a payment of $701. Then you have to pay sales tax within 30 days. Let's use 7.5%. There's $2,962.50. After license fees and whatnot, let's call it an even 3 grand. You go to trade that car in 3 years later w/ 75,000 and the value on it is $20,250. Over the course of 36 months, you've paid $24,535. Only $22,000 of that went to principal, so you've got a payoff of  $27,500. Now you're 7 grand upside down. So even leaving out the negative equity, you had 35 payments (no payment for 45 days) of $701 totaling $24,535. Plus you spent $3,000 on sales tax. So over 3 years, you've spent $27,535. And you're still flipped going into the next loan.

     

    So, $20,570 to lease for 3 years and drive 75,000 miles, OR $27,535 to finance and drive 3 years and 75,000 miles. 

     

    You tell me which is cheaper......

     

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    Thank you for expanding, I see your point.  

    However, this works only if somebody wants to replace the car after 3 years.  If somebody keeps the car for 5 and more years vs continuous lease payment, then it is not so clear cut anymore IMO.

    Taking your example:

    Assuming after three years somebody managed to lease a car with similar payment.

    Then: $570 x 60 = $34200

    If somebody bought the car in 5 years he will pay it off for total of $42051 plus $3k registration, so $45051.

    Assuming depreciation with that kind of mileage is around 75% the residual value will be around $10k, so $35051.

    So it seems at 5 years it is pretty much a wash and then after that the person leasing is still paying $570 a month while the person owning only has depreciation to worry about (which will be negligible at this point) and the maintenance, which might be high because of the mileage but I doubt as high as $570 a month,  

    I guess it just a matter of personal preference if somebody wants a new car every three years or he is happy to keep car for the long run.

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    That is a valid point. For such individuals, buying is the better option. There is no doubt, leasing is not for everyone. But for some, it is a very beneficial route. 

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