Car Buying

Why Lease Deals Could Be Harder to Find

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author photo by Russ Heaps June 2016

When compared with the average monthly new-car loan payment, lease deals are still relatively tempting. According to the consumer-credit experts at Experian, in the first 3 months of 2016, the average monthly payment on a new-car lease -- $406 -- was still $97 per month less than $503, the average loan payment.

Simply stated: On average, leasing continues to take a smaller bite out of family monthly budgets than a new-car loan does. We don't believe leasing makes the best long-term financial sense for most people, but if your main concern is getting into a new car with as low a monthly payment as possible, a 36-month lease will beat a 36-month car loan every time. In fact, the average monthly payments listed above are based on the average lease term of 36 months versus the average car-loan term of 68 months.

By Experian's accounting, the average monthly payment on new-car loans increased by $15 from the first quarter of 2015 to the first quarter of 2016, while the average lease payment jumped by just $1. A big shift upward in used-car inventories, however, could force an increase in lease payments during the remainder of 2016.

Determining Leasing Payments

Leasing is a form of renting. When you lease a car, you're basically financing only the value that the vehicle will lose (or, depreciation) during the lease contract. If you lease a car for 3 years and it's expected to depreciate $7,000 during that period, your 36 monthly payments will be based on that $7,000, plus interest and whatever fees are also involved. Depreciation is closely tied to used-car prices. As used-car prices increase, new cars will depreciate less; falling used-car prices increase the estimated depreciation of new cars.

Why Used-Car Inventories Are Increasing

When the economy took a dive in 2008, new-car sales plummeted, and leasing all but disappeared. Trade-ins and vehicles coming off lease are the source for nearly all used cars. As new-car sales decreased, so did the inventory of used cars. Add to this the government's Car Allowance Rebate System (better known as "cash for clunkers") program that removed another estimated 690,000 used cars from inventory, and used-car availability was bound to shrink.

According to the experts at NADA Used Car Guide, the impact of the recession reduced the supply of used cars by 20 million units. During recent years, however, new-car sales have not just returned to pre-2008 levels, but actually exceeded them. Leasing has also bounced back from just over 13 percent of new-car sales during the depths of the recession to nearly 32 percent in 2016.

The first big batch of vehicles coming off 36-month lease contracts since the recession is flooding the used-car market this year. These, in addition to all the trade-ins resulting from the huge new-car sales volume the past couple of years, have used-car lots crammed with cars.

Why Used-Car Inventories Matter

Supply and demand drive a free market economy. When there is more demand than supply, prices go up; when there is more supply than demand, prices go down. More supply means lower average used-car prices. If there are more 3-year-old Toyota Camrys this year than there were 3-year-old Camrys last year while the demand for 3-year-old Camrys remains the same, they will fetch less this year than last.

The Bottom Line

NADA expects new-car sales to remain strong through the remainder of the year. This will keep the flow of trade-ins coming. Combined with the flood of off-lease cars, this will cause used-car prices to decrease between 5 percent and 6 percent in 2016. Such a decrease will have a ripple effect of increasing the predicted depreciation of new cars by about 3.5 percent. This increase in depreciation will be reflected in higher monthly payments for leases.

What it means to you: Lease deals will be more difficult to find. If you're going to lease a car, do it sooner rather than later.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Why Lease Deals Could Be Harder to Find - Autotrader