Buy or lease? A glance at the options now that interest rates are at record lows
One of COVID-19’s impacts has been the reduction in interest rates, including those for auto loans. In June 2020, the average interest rate for new auto loans decreased to 4.2%, down from 6.0% one year ago, according to Edmunds.
But Americans are buying more expensive vehicles, which means monthly payments have increased year over year. As of June, the average payment is $568 per month. This has caused many shoppers to turn to leasing and its lower payments, freedom from long-term maintenance worries and lure of getting a new car every three years.
But with interest rates at record lows, is it still worth leasing a new car?
We took a look at the financial outcomes of buying and leasing to see how current finance trends might affect your decision.
Low finance rates make buying more appealing
Earlier this year, the average new-car loan term hit a record high 70 months, or nearly six years. This is due in large part to automakers offering low interest rates on 72- and 84-month terms. At the same time, the average amount financed has increased, as shoppers opt for vehicles with more options and features, driving up transaction prices. In June, new-car buyers financed an average of almost $35,000. At 4.2% APR over a six-year loan, that makes for a monthly payment of $551.
Buyers pay more per month for loans since they’re financing a greater amount, but with the goal of owning something with equity after the loan is paid off. Of course, the vast majority of vehicles are depreciating assets. On average, a new vehicle loses about 60% of its value over six years.
Consider this example. Let’s say you buy a new vehicle priced at $39,000. You put $4,000 down and finance the remaining $35,000. By the end of your loan, you will have paid a total of $43,672 with interest. Your vehicle, six years later, will only be worth about $15,600. But it will be paid off and yours.
The cost of leasing
One appeal of leasing is that it’s easier to qualify for promotional lease rates than for promotional loan APR offers, and that’s reflected in the current low average monthly lease payments. In June, the average lease payment was about $461.
Over the hypothetical equivalent of a six-year lease, a lessee would pay a total of $33,192. That’s significantly less than our purchased vehicle example.
However, that amount doesn’t include the down payment, which on average can be $2,000 or more. Since lease terms are usually 36 months, a shopper would have to lease two vehicles to match our buying example. That means making two down payments, bringing the total cost closer to $37,000.
That’s still less than what our average buyer in the previous scenario spent. But consider that the lessee is left without an asset. If you factor in the value of a vehicle at the end of a loan term, the average lessee actually winds up more in the red than a purchaser, to the tune of about $9,000.
A major appeal of leasing is that your vehicle will always be under warranty, so you don’t have to worry about unexpected repairs, just routine maintenance. For a buyer, maintenance costs can get more expensive over six years, as items such as tires, batteries and brakes begin to wear. Automotive warranties also typically expire after three years. Depending on the vehicle and your driving habits, buying can get pricey.
Leasing also gives you an easy out on the vehicle after a few years. It is harder to get out of a car loan in three years without making the next loan more expensive.
Edmunds always recommends opting for the shortest loan term that fits your budget, and ideally picking a vehicle you can pay off in no more than five years. Then it’s best to keep your paid-off car for several more years, for maximum financial benefit. But if you like being in a new car every few years, or are considering a long loan term on a vehicle that might have high maintenance costs down the road, a lease could still be right for you.