Leasing a car is a great option for many people, but leasing has changed significantly in the past few years. It is becoming a less popular option, with about 30% of new cars being leased before the pandemic compared to about 20% now. But why is this the case, and is leasing a car still a good idea?
Here’s what’s going on with car leases in 2023.
What are the benefits of leasing a car?
Leasing a car is a popular choice for a number of reasons, and depending on your situation it might be a great option for you.
It is cheaper than financing a car.
One of the major advantages to leasing is simple: it’s much cheaper. When you finance a car you are paying for the whole car over the course of your repayment period. Whether it’s three years or six years, you will pay off the entirety of the car, plus interest and fees, in that period. But leasing works differently. You only pay for the depreciation that occurs over the period that you are leasing. If your car’s residual value (the expected value of the car at the end of the lease period) is $10,000 less than the sticker price of the car, your lease payments will pay for this $10,000 difference (plus interest). Compare that to paying for the entire $30,000 car and it’s clear to see that it's a much cheaper alternative.
You don’t need as much money up front.
Similarly, when you lease a car you don’t have to worry about securing a down payment. Down payments are essential when you are financing a car. They keep your monthly payments lower, secure you better car loan APRs, and help combat depreciation (which can make your loan go underwater). But leasing doesn’t require a down payment, and there is rarely a benefit for providing one.
You can get a new car every few years.
If you are the type of person who likes to have the latest and greatest, leasing is a great option. Depending on your lease period, you can get a new car every two or three years without the hassle of selling your car.
It provides more tax deductions.
If you are a small business owner or work for yourself in some capacity, leasing a car allows you to write off more than if you were financing a new car.
Why is it so hard to lease a car right now?
If there are so many benefits to leasing, why is it so hard to lease a car today? Well, there are three primary reasons why leasing a car today is more difficult: higher car prices, fewer returning customers, and less compelling lease offers.
Higher Car Prices
It’s no secret that new car prices are still at record highs. The pandemic shutdowns caused a delay in new car production which we are still feeling the effects of today. A shortage of raw materials, delays with semiconductor production, and labor shortages have helped create a slowdown in new car production. And when there is less inventory there are higher prices.
One of the main reasons people lease is because it’s affordable. But these increased prices are driving higher monthly lease payments and pricing many people out of leases.
Fewer Returning Customers
Another major allure of leasing is that you can get a new car every few years. But in order to get a new car, you have to give your old one back (or buy and then sell it). The lease buyout price is determined based on the residual value of the car, a number that is predetermined when the lease is originally signed. The residual value cannot be changed later on based on market value.
But with the current high prices of new cars, it made much more sense for lessees to buy out their leases. The residual values listed in their contracts were much lower than the market prices of their cars, so buying out made much more sense than simply handing the keys back over and leasing another car (with a higher sticker price and therefore higher monthly payments).
Many potential returning lessees chose to get a car lease buyout loan which allowed them to purchase their leased cars and keep them. This converted a lot of lessees to car owners.
Less Compelling Lease Offers
Car manufacturers do not really care about offering car leases as they make more money simply by selling new cars. With less inventory, they would rather sell the cars, especially since the demand is there for new car sales.
Leasing incentives are at all time lows right now, and in many cases lease payments are almost as much as financing payments. With no incentive to lease, consumers would rather purchase their cars and have equity at the end of their repayments.
Will car leases go down in 2023?
While it’s always hard to predict exactly what will happen this year with the automotive market, it is expected that lease prices will probably stay the same this year. New car prices seem set to remain high (although hopefully they will drop off slightly over the next several months), and new car prices are one of the biggest factors of lease payments.
Despite these conditions, there will always be people who want to lease their cars no matter what. The benefits far outweigh the disadvantages, even if it is not a cheaper option.
Is leasing a car a good idea financially?
So, is it a good idea to lease a car now? It depends a lot on your situation. If you need a new car in 2023, leasing and financing may both be expensive options. But when you need a new car, you need a new car. If 2023 is the year for a new car, make sure you take the following steps:
- Make sure your credit is in top shape before applying for a lease or a loan. The best rates are reserved for people with good and excellent credit scores. Credit score requirements tend to be higher with leases, so if you are looking to lease with a mediocre credit score you may have a hard time.
- Shop around for the best deals. Whether you are looking to lease or buy, shopping around is key. Monthly payments for both will be heavily based on the price of the car, so getting the best deal will help ensure you have reasonable monthly payments.
- Research lenders and lease companies. Make sure you are considering customer satisfaction ratings. There’s nothing worse than getting in a bad financial relationship that you can’t bet out of easily.
Here’s how to determine whether you should lease or buy a new car in 2023.
You should buy a new car if…
You like owning a car: If you like the feeling of having a car that is all yours, leasing is definitely not for you. Leasing a car is essentially renting a car, and it’s never truly yours.
You like customizing your car: If you are the type of person who likes customizing their car, you should definitely buy a car as opposed to leasing a car. Tinted windows, custom paint jobs, and any type of modifications are strictly prohibited when you lease.
You drive a lot: If you drive a lot of miles you will most likely go over your yearly mileage allowance. Going over this allowance will result in heavy fees and make leasing a car much more expensive.
You like to work on your own car: When you lease, you have to use a certified and approved mechanic and use certified manufacturer parts. If you are the type of person who wants to fix things themselves, leasing a car is not a good option.
You should lease a car if…
You want the latest: If you want a new car every few years, leasing is the way to go.
You can abide by the limitations: Leases can have strict usage limitations, including mileage allowances. If it doesn’t bother you to play by their rules, leasing may be more beneficial.
You don’t want to work on your own car: If you aren’t the type of person who enjoys working on their car on the weekend or tinkering with customizations, leasing may be an easier option.
You own your own business. Leasing maximizes tax deductions and may make more sense if you are a business owner.
That’s the deal with car leases in 2023.
If you need a new car in 2023, it’s entirely possible to lease or finance. It’s important to take the time to research and get your credit score in good shape before you go ahead with anything.
If you have a lease already, it might be a good idea to purchase your car with a lease buyout loan. Auto Approve can help connect you with the right lender so you can avoid today’s current volatile auto market and keep the car that you love.